Book review: Exponential organizations

ExOExponential Organizations ExO achieve creative destruction using disruptive technology. This book gives an insight in how to become an ExO. 

In the book Exponential Organizations IsmailMalonevan Geest and Diamandis discuss the phenomenon of exponentially growing markets and the companies that drive the market. An exponential development means a 100 percent increase at regular intervals. An example mentioned in the book is the mobile market. The number of sold telephones doubled between 2002 and 2004. The same thing happened between 2004 and 2006. And again from 2006 to 2008. Many operators have the bad habit of (not?) understanding the consequences of exponential growth, which is one of the points made by the author. They try to show with successive examples what happens and demonstrate how exponential growth is underestimated. In the year 2002, various analysts such as Garner Group and McKinsey assessed that the mobile market would increase by approximately 35 percent, showing linear growth. However, the increase was 100 percent. After this miscalculation, the forecast was cut significantly for the coming two years, and thus miscalculated again. The same thing was repeated in 2006, and then they agreed to an even lower forecast than before. After failing three times in a row they again made a linear growth forecast of 25-30 percent over the coming two years. And they were wrong again, the market doubled.

Another example showing exponential growth is the Human Genome Project. It started in 1990 in order to map the complete human genome. The budget was $3 billion, and the estimated time 15 years. Halfway through the project, one percent of the human genome had been mapped. External experts spoke about fiasco and that it would take 700 years to finish. The team said that they now where halfway. What they knew, but everyone else missed, was that they doubled the amount of mapped genome every year. One percent doubled seven times equals 100 percent. The project was completed in 2001, prior to the time plan and on a smaller budget. The so-called experts failed the end date with 696 years.

An example not mentioned by the authors, but still actual is the growth of wind energy in Sweden. In 2002, approximately 0,5 TWh was produced. Three years later, the production was doubled to 1 TWh. In 2007 it was doubled again to two, in 2010, 4 were achieved and in 2013, 8 TWh were reached. Now, everything indicates that 16 TWh will be reached during 2016. But after this, the forecasters estimate that the development will become linear. Why is that? Wind energy is a typical example of a product that through long series shows decreasing prices and increased performance on a rapidly growing market. The improvement effects become exponential. At present, the production of nuclear energy has reached 64 TWh, a level to be reached by wind energy in 2021 at the current speed. The nuclear power plants and other types of energy produced as one-piece products do not have the possibility to meet the competition from long series, where the development cost can be divided into many units. The energy companies in Europe have entirely miscalculated the development rate and are now losing enormous amounts of money.

Vattenfall and other energy companies are not the only ones to not keep up the development pace. At the end of the 1980s, Motorola estimated that the mobile market was the future. It was entirely correct, but then there was an error. In the 1980s the costs for pylons were very high. And the telephones were bulky. Therefore, Motorola came up with the idea that a net of satellites would be better. They launched and implemented the Iridium project. This was a fiasco. The costs of the pylons fell sharply and at the same time mobiles became increasingly smaller. Motorola’s mistake was to believe that development is linear and not exponential. Motorola had also locked the business plan for 12 years before the system was taken into operation.

According to the authors, when something grows exponentially, it is about disruptive technology. Or as Schumpeter called it, creative destruction. The number of sectors exposed to creative destruction will increase since information systems create new conditions, argue the authors. Uber changes the taxi market through an app and an entirely new way to solve the transportation problem, Airbnb changes the arena for the hotel market in a similar way. These are examples of companies growing more than ten times faster than the traditional companies in the sector. These companies are therefore called exponential organizations, ExO.

The book’s second and main aim is devoted to describing what it is that makes a company an ExO and how to become one. The authors emphasize that today’s line and matrix organizations were developed in order to create stability in a linear world. In order to achieve exponential growth, organizations able to create instability and creative destruction are required. Even if it is the organization’s own activity to be attacked. The authors describe how today’s organizations, on the contrary, are attacking everything that are menacing the current business model and products. They call this the organization’s immune system. In the example I mentioned about the energy companies, Eon tried to solve the problem of the immune system by dividing the company in two: Eon and Uniper. While Uniper receives all old types of energy, Eon will develop new solutions which, in the long run, will be ousting Uniper. More dynamic companies, such as Amazon have the capacity to develop new solutions cannibalizing on the old activity. For example, Amazon has Kindle, which is hitting against its own book trade. So how is this done?

If you want all the tips you are recommended to buy the book (available as an e-book on, for instance, Google Play). I will show you some examples. The main subject is to reach the organizational structure. To have steep drainpipe-like development organizations is not a success factor, according to the authors. The development work needs to take place in networks with shifting participants, and in different locations. A part of the development work should possibly take place openly in different communities. One must dare to experiment and to have short development cycles with an (what I call) agile approach. The work teams will be self-organized and multidisciplinary with decentralized authorities. Where the information arises, the decisions will be made. One will not need to search for information, it will flow to you.

The above pieces of advice, as well as many others, are good. But if you start out with Puls, important things are missing, I think. How do you build an organization that is as agile as the authors request? The same thing regards how to lead a dynamic and changing company. A management with focus and ability to handle the difficulties that inevitably will appear is required to achieve a massive transformation.

Many of the arguments in the book, as I have illustrated above, are remembered from the research results of the past 50 years. Different researchers, through their results, have repeatedly recommended agile (organic) organizations. Industrial leaders have refused to listen and instead created linear bureaucracies. The result is as Phelps and Sjöö have shown, permanently sinking innovations. The message from Exponential Organizations is, however, that disruptive technology is actually arriving on a broad front. In that case, the market changes very quickly and very dramatically.

The book Exponential Organizations is worth reading and it is full with advice. In particular, it is good for companies with Puls, since an agile platform is in place to which apply the advice.


The image is processed using material from Bruno Gilli / ESO CC BY 4.0 and Staffan Engström CC BY-SA 4.0 from Wikipedia.

Jan Wallander

Jan Wallander old office Sundsvallsbanken

From Vängåvan to Kungsträdgården by Jan Wallander is more than ever on top of the agenda in view of the need for new agile organizational forms to be developed and disseminated.

From Vängåvan to Kungsträdgården: Decentralisation – Ideals and Reality by Jan Wallander was published in 1991. It is perhaps a bit late to make a review, however, the thoughts and ideas of Wallander are more important than ever. Companies with top-down management and hierarchical business culture are no longer competitive. It is necessary to develop and disseminate new and more agile and dynamic organizational forms.

Jan Wallander (born 1920) was the CEO of the Swedish bank Sundsvallsbanken in the 1960s, he was the CEO of the Swedish bank Handelsbanken in 1970-78 and then he was the Chairman of the Board until his retirement in 1991. Today it seems that few people know who Wallander is, and even fewer know of the results he achieved in Handelsbanken, at least outside the banking world. This is a pity since the way Wallander organized a company has been shown to be highly successful. It is above all Handelsbanken’s performance through the years which has demonstrated that Wallander achieved something special. While other banks had great difficulties during the real estate crisis in 1990-1994 and during the finance crisis in 2007-2008, Handelsbanken was doing all right. Frequently, the Toyota Way is highlighted as an example on how to organize a business activity. And there is a lot to learn from Taiichi Ohno’s methods for daily guidance and decentralisation of problem solution. But, many valuable lessons can also be drawn from the bank Svenska Handelsbanken. In the book From Vängåvan to Kungsträdgården, Jan Wallander tells us about his way of organizing an activity and how this agile organizational form emerged.

Vängåvan is a small park in the town of Sundsvall, Sweden, which extends in front of a palace-like building, formerly the central office of the bank Sundsvallsbanken. On taking up his duties as the CEO of Handelsbanken, Wallander had no experience in banking. He had to take a distance course for bankers when he started working. A course that all future bank employees were supposed to pass. Maybe this was the reason that he chose other solutions than the usual. Without preconceived ideas it may be easier to perceive the actual needs in the activities.

An example of Jan Wallander’s independence is the organizational chart he developed. When he detected that Sundsvallsbanken lacked these charts, he believed that introducing them would be an appropriate measure. Everyone else has organizational charts and they are basic in all management literature. But when he discussed this matter with different persons, and in particular, with his predecessor Erik Huss, he was discouraged. Firstly, the bank functioned well without charts. And to draw a chart would cause problems in the future. If the organization were to be modified, the chart would have to be redrawn and there would probably be individuals who would feel to have been put in an inferior position and to have lost face. If there is no chart, changes can be implemented gradually. Wallander listened to the advice, and this caused both Sundsvallsbanken and Handelsbanken to be more flexible when changes were introduced. When there is an organizational chart, every change becomes a painful experience often expressed by many employees. Stories about the last change and how difficult everything turned out because of this, has been expressed by a lot of people. A lot of energy is lost due precisely to the organizational chart, a chart which in reality describes very little of how the business activity actually functions with its informal channels. As Wallander pointed out, the telephone directory can be used to obtain all necessary information about who the manager is for a specific unit.

One of the most important interventions to make a bank profitable and with a minimum of credit losses is, according to Wallander, to place the responsibility for granting credits on the employees in the branches. When Jan Wallander implemented this, it was a revolutionary way of thinking. The view was that complex decisions always should be made by experts. At Handelsbanken there were a lot of experts at the central office in Stockholm. All important matters should therefore be submitted for analysis to the expert, then the management made the decision at the general assembly. This way of thinking was high fashion then and perhaps still is in some companies.

Wallander affirms that decentralisation is the basis of the success of Handelsbanken. So did also Taiichi Ohno, the author of Lean. To work in teams and to organize the work in order for the operators themselves to solve issues arising due to discrepancies is fundamental in Lean. As several researchers noted, in particular, the European industry has difficulty in delegating to the employees. When making decisions in the branches, a higher bandwidth is achieved in the decision-making. Over time, this bandwidth is increasingly difficult for the competitors to handle. While a decentralized company can go through several decision turns in, for instance, the contacts with a customer, a top-down company may have time for one. Wallander also notes this difference. This is what we also can observe in companies with agile organizations. Matters are solved much faster and more accurately. Accuracy is achieved through being close both to the problem and to those affected by the problem. A situated learning is created. An expert, independently of how well-trained and smart he is, cannot match the loops of learning of those in contact with the problem.

However, in a decentralized organization matters requiring a higher level also arise. Wallander describes the effect of decentralisation on the granting of credits to the branches. The years before he took office as CEO there were 725 matters handled by the central board. Twenty years later, the number was down to 50-60 a year. The matters actually handled by the central office in a decentralized organization are the truly complex matters requiring strategic competence. We have the same solution in Puls. Matters are constantly upgraded from the projects to strategic Puls meetings. But few matters require this kind of attention, which is why there is the time and possibility to work them thoroughly.

Wallander was during his time at Handelsbanken most well-known for abolishing the budget process. The only thing done in  the budget process is to project the history on the future. This says nothing about what will happen in the future. To plan in the form of budget processes risks locking up the company in the past. What is needed is a structure allowing the company to create its own future. How Wallander solved this is unfortunately not specified neither in this book nor in the follow-up book “With Human Nature – not Against! To Organize and Lead Companies. But as Wallander writes in the book reviewed here, he does not disclose all secrets on how to successfully organize a decentralized business.

Not all secrets of Handelsbanken are disclosed, but despite this, I recommend all managers and others interested in organizations to read Jan Wallander’s books. There is a lot of food for thought, in particular now when hierarchical company culture is increasingly questioned.

The problem with the economy in the Western world

StephensonWhat is the problem with the economy in the Western world? Jobs are disappearing and exclusion is increasing.

The past weeks backward economic development in Europe and America is observed both by researchers and journalists. Stefan Fölster wrote a debate article in the Swedish newspaper Dagens Industri (Today’s industry) on 10 September arguing that the Swedish industrial production fell by 10 percent in the past five years. The day after, this was discussed in the editorial “Defensive Large Companies Suffocate Innovation” of the same newspaper. The editorial makes references to, for instance, an article in The New York Review of Books called What is Wrong with the West’s Economies? by Edmund Phelps.

In the past I have written about the problems of the Swedish industry in, for instance, Sweden Loses Export Shares and The Decrease of Innovation. In the latter, I discuss a study by Karolin Sjöö about the decline in innovations in Sweden from the 1980s. In the article What’s Wrong… Phelps discusses the same issue, but applied to the Western world as a whole. Briefly, Phelps is of the opinion that our attitude towards innovations and changes has gone through a major transformation lately. In particular, during the nineteenth century there was a great deal of enthusiasm for finding new solutions to old problems. In those days, entrepreneurs and engineers, such as George Stephenson, could develop entirely new transport solutions (the railway) that essentially changed the world.

Stephenson was born of poor parents and all lacked education. But he was a proficient inventor who soon received support from investors and politicians. His biggest achievement was perhaps that he succeeded in building the first railway line in the world. The double lined railway between Liverpool and Manchester. Stephenson, as well as many other entrepreneurs and engineers, was able to achieve huge changes, despite the fact that he was not part of the elite. Many were not even able to read. But, of course, there were also well-trained individuals who achieved a lot. The mathematician and statistician Florence Nightingale fundamentally changed health care through her research. Her proposals were accepted despite the fact that she was woman in a society dominated by men.

As Phelps points out, this type of innovations and changes are uncommon today. Today’s society and the way it is described is based on the perception of the human being as a machine, a robot acting according to a program. They are cogs in the machinery. When these robots are on vacation they are expected to be “recharging the batteries”. To imagine new solutions is almost considered improper. Phelps shows, by using statistics, that in the 1960s America started to decline from the innovation peak. Europe followed a few decades later. This is entirely in accordance with Karolin Sjöö’s results.

The problem with a decaying economy is that exclusion increases, Phelps points out. Unskilled jobs disappear through globalisation and productivity improvements. No new jobs are developed. It is therefore the lack of innovations and changes that lead to the lack of unskilled jobs The frequently acclaimed Silicon Valley is only responsible for 3 percent of America’s economy. It is not too much of Silicon Valley, but too little. Despite the lack of innovations and change, many are nevertheless disturbed by “all” the new products from companies such as Apple. So what is causing this reluctance to change? Phelps does not have the answer. Ken Robinson, on the other hand, proposed an answer. We need creativity and imagination to imagine new things, says Robinson. We all have this as children. But where does the creativity go after that? Adults seem not to have it, says Robinson, and Phelps agrees. We are trained to lose it, says Robinson. It is interesting to note that countries with major investments in science, technology and mathematics do not have more innovations.

I believe we are a product of the same society we are creating. This applies both when we speak about Sweden as a society or an enterprise. We see society as a machine. The many machines we use every day have made us believe that the whole world is a machinery in which we all have predefined tasks, like cogwheels. In order for us to break free from this view, we need to accept that social systems should be dynamic (agile) in order to be able to adapt to changing circumstances. To remain idle is not an eligible possibility. The lack of adaptation in the form of innovations leads to an economy in decline. This leads to exclusion which in turn leads to crime and social unrest.

It is time for innovations and changes in the way we organize society and companies.

Is Tesla disruptive?

Tesla

In an article that attracted much attention in Harvard Business Review the question was posed on how disruptive Tesla actually is. The reply was, not at all.

The concept of disruptive technology was coined by Clayton Christensen in the book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. In the book, Christensen shows how new technology often starts off as a “poorer” and cheaper alternative to the existing solution. However, the new technology is getting better over time, and as prices are lowered, the existing companies are overthrown. An often repeated example on disruptive technology is how the mainframe was substituted by the minicomputers, which then in turn was ousted by the PC.

Christensen was not the first to observe this, Joseph Schumpeter discussed the phenomenon already in the 1930s. He called it creative destruction. I am of the opinion that Christensen’s definition is too narrow. Disruptive technology does not need to begin with a product that is poorer and cheaper. Smartphones rapidly killed off Nokia’s and Sony Ericsson’s products which resulted in closures and layoffs. A smartphone is not, as the name implies, a smart mobile telephone. It is a computer packed in a mobile phone shell – also used as a phone! It is not poorer or cheaper. We, the customers, have adapted quickly, a smartphone creates added value for us users. I view smartphones as an example of how disruptive technology essentially transforms the market.

Companies have difficulty to handle changes. They are often stuck in today’s product and business model through their line organization. In these organizations, information and knowledge are power. To make changes in the line organization is not simple, since power is linked to position. In agile organizations, such as Puls, power is to be able to share information and knowledge. Then it is much easier to make changes.

In order to return to Tesla, is Tesla disruptive? Does this change anything for us customers? Is this a threat to the leading manufacturers, Toyota, VW and GM? Tom Bartman, among others, answers no in Harvard Business Review. Christian Sandström followed up with an article in MIT Technology Review in which he answers yes. Sandström argues that Tesla has built an organization that fits the new product, while the established companies are permanently stuck in an organization adapted to the old product.

It is notoriously difficult to anticipate what will lead to creative destruction and important changes in people’s behaviour. Considering the present situation, I perceive Tesla as a new car manufacturer, exactly as said in the HBR article. Moreover, Tesla is part of a major change in the energy market. Operators such as BP, Exxon and Statoil have as much to fear from Tesla, as GM, VW and Toyota. Wind energy, solar energy and batteries are all examples of technologies that, compared to existing technology, were (are?) inferior. In the area of energy, an ongoing classic example on exponential growth and creative destruction is, for example, how Vattenfall is watching its assets being erased at an increasingly rapid pace.

I believe, as does Sandström, that the automotive industry may undergo a fundamental change due to Tesla. Manufacturers stagnated in the diesel technology are in danger of extinction. This is due to a better organization, according to the reasoning of Sandström. Traditional line organizations tend to cement old solutions and business models.

Currently there is new technology under way from Google and Apple that may transform how we perceive cars: driverless cars in urban traffic. Today we see cars as a possession and something we ourselves drive. It should be possible to manufacture a simpler and less expensive car than the cars of today. Basically, the majority of the car buyers want fast and easy transportation. A smartcar that not only can find the fastest route between A and B, but also does it fast and inexpensively might be a winning concept. Today, it is very expensive to own a car that most of the time is stationary. If it was possible to reserve transportation from A and B using an app, and a smartcar arrives a few minutes later, maybe a disruptive technology has seen the light of day. The technology development is under way in this direction. Tesla is contributing to this.

One thing is for certain: changes seldom turn out as intended.

Sociotechnology and Lean Have a Lot in Common

Visuell styrning sänker osäkerheten.

Lean is a method of working that relies on decentralized and self-organized teams. Sociotechnology and lean are closely related.

A lot of criticism has been levied at lean for causing stress and contributing to a negative working environment. Some Swedish researchers link lean with a reborn form of Taylorism. One reason for this criticism is that a lot of what is marketed under the label lean in reality comes from Taylorism and bureaucratic traditions. The result of this is documented in the book Lean i Arbetslivet (translation: Lean At Work).

Lean is Daily Management and Decentralization

As I wrote in previous entries, lean consists of two principles: visual management and “deal with problems as they appear” (fault tolerance).

Visual governance means the use of visual signals to coordinate work rather than forecasts and plans. These signals create a real-time management that is based on the current situation and plan for the next couple of hours. There is considerable less uncertainty in visual governance when compared to traditional large-scale planning. Less uncertainty at work means less interruptions, which leads to higher productivity.

Fault tolerance refers to the implementation of mechanisms to catch and deal with problems and troubles that appear without pausing operations. The problems should be taken care of by the people closest to them. In production the people closest are the operators and within projects it’s project participants. When problem-solving is distributed within the organization, decision-making is given greater “bandwidth” regardless of whether decision-making and problem-solving is done by management, project leaders or experts.

Visual governance and fault tolerance are principles that need to be converted into appropriate methods that suit the organization with implemented together with lean.

Misconceptions About Lean

There are many misconceptions about lean and one reason for this is because the uncertainty that’s present in long-term forecasts only becomes apparent many years later. One common misconception is that lean requires the invention of standardized processes in production and constant improvements. However, this has been known since the 18th century. Some people also believe that standardized processes are vital for lean to work but that isn’t true. On the contrary, a rigid thought process in a social organization creates large problems, as demonstrated by sociotechnology research.

Sociotechnology

Sociotechnology was born at the Tavlstock Institute following World War II. In sociotechnological system theory, the organization is divided into two systems: technical and social. The technical system consists of equipment, machines, tools and methods. The social system consists of people, interactions and knowledge. The technical structure affects the social organization.

Concept for a sociotechnical system

Research conducted by the Tavlstock Institute demonstrated the negative consequences of Taylorist solutions, including problems with unclear work duties, individually designed tasks, top-down management, constricted thinking with clearly defined roles and standardized working methods.

Sociotechnology proposes self-organized teams where tasks and responsibility are determined by the work that is accomplished. Research shows that sociotechnology leads to higher productivity compared to Taylorist solutions and the explanation for this is found within the human equation: people working in teams were more motivated.

Today, thanks to complexity theory and systemized thinking, we have a slightly different explanation. Taylorist solutions don’t lead to high productivity as was thought; on the contrary they lead to inefficiency. The reason for this is that in a social system, standardized processes with little room for freedom lead to chaos. In order to create order in whole systems and keep up high productivity, a large degree of freedom at the individual level is necessary. That is one needs a multidimensional system for both management and workers.

This means that a certain lack of order at the individual level leads to order within the organization as a whole. This is far from intuitive but the results of complexity theory are convincing and backed up by empirical organization research.

The problem with the sociotechnological system school is the lack of suitable methods. This is where lean enters the picture.

Implementation of Sociotechnology and Lean

A correct implementation of Lean can be characterized by the following:

    • Duties are broken down into manageable sections since that facilitates the distribution of the workload. In Taylorism, duties are separated.
    • With Pulse, we use manageable sections with larger, related duties.
    • Work is done in groups, teams and projects to complete the sections. In Taylorism, work is done individually.
    • Within FoE we work in projects and teams. At Pulse these are self-organized.
    • That the people who work in groups, teams and projects are encouraged to be able to take care of several different duties since that makes it easier to distribute work and problem-solving. Taylorism requires maximum specialization.
    • With Pulse, there are few roles. Cooperation is the key. No activities are dedicated to a specific role or position. People choose what to work on.
    • There are few permanent roles. In Talyorism, the defining of different roles is very important. Within Pulse, there are just a few permanent roles.
    • Increase individuals’ and groups’ ability to act so that everyone can adjust their actions to the current situation and unforeseen events. The goal of Taylorism is to decrease the ability to act through standardization and optimization of processes.
    • With Pulse there is no standard way to work or process thinking. Pulse is a part of the technological structure and it is within this structure that visual management is used.

The above list, which details the components necessary for a successful implementation of Lean stands in contrast to Taylorism and bureaucracy. Instead, it aligns with sociotechnical systems. When correctly implemented, lean is a way to realize the ideas behind sociotechnology.

Socioteknik och lean - produktion
Within production, the system is shaped to facilitate teamwork. Visual management and distributed problem-solving are utilized.

 

In production, the kanban is used for visual management within the technical structure.

Socioteknik och lean - FoU
Within strategy and development a network of Pulse meetings are used to facilitate teamwork. The Pulse meetings use visual management.

Within strategy and development, the physical spaces in the form of the team room, Pulse room and Pulse boards make up the technological structure. The Pulse meetings form a network that we call an agile network organization.

Sociotechnology was created in the 1960’s and is based on the knowledge available then. The past decades have seen a fast development within organizational theory based around complexity research. The main tenants of sociotechnology, including self-organized teams, have strengthened in recent years while the explanation models have changed considerably.

Today there are methods to implement sociotechnology with the help of Pulse.