Development is not something that is done to an individual or group; it is something they do to themselves. It is an increase in the ability and desire to satisfy one’s needs and legitimate desires and those of others. It is a matter of learning, not earning. No one can learn for another, but one can encourage and facilitate the learning of another. Development is not a matter of how much one has, but how much one can do with whatever one has and what resources can create out of what is available.

Organizational development requires leadership, which is primarily an aesthetic activity. One who leads development must inspire pursuit of a vision in whose production the leader had a hand. A vision is a picture of a state more desirable than the one that the organization currently is in. Leadership must also faciliate development of the strategy, tactics, and operations by whose means the vision can be pursued. Since the vision is often one of an ideal that can never be attained, though it may be approached continuously, leadership must see to it that the pursuit itself is satisfying, that it is fun as well as meaningful and valuable. Effective pursuit of an ideal requires the leader to extract the best possible effort from those who follow. In a corporation, this requires providing nothing less than a very high quality of work life.

Part of leadership is an appropriate ethical-moral judgement process. The ideal process would encourage leaders to make decisions only by consensus of all stakeholders. And the final decision should never deprive another of the ability or opportunity to develop unless the one affected by the decision would otherwise deprive others of this ability or opportunity.

However, the number of stakeholders of some corporate decisions runs into the millions, and there is just no way of involving all of them in every decision that affects them. For that reason, multi-national enterprises have to use representatives of various stakeholder groups. In a perfect world, any organization would designate individuals who will be responsible for identifying and evaluating the effects, if any, of current decisions on future generations’ choices and the ability and desire to make them.

A vision that involves a radical change in the way an organization is conceptualized is a transforming vision. One who leads the pursuit of such a vision is a transformational leader. Transformations are primarily qualitative, rather than quantitative, and are large discontinuities, not merely reform or incremental improvements.

The transformation to systemic thinking has brought with it a growing awareness of the fact that the effectiveness with which any of our daily activities (work, play, learning, inspiration) can be carried out depends on the extent to which they are integrated. Making it very apparent that a transformational leader must be able to integrate the various aspects of life in order to effectively pursue development. The transformational leader is one who can create an organization that reunifies life, who integrates work, play, learning, and inspiration.

The transformation of an enterprise from one conceptualized as an animate system to a social system is only one kind of transformation that is possible. However, in our current environment – one characterized by an increasing rate of change; increasing complexity; and an increasing rate of production of understanding, knowledge, and information – there is no other type of transformation that can bring about the necessary focus on employees, customers, and the other corporate stakeholders. A corporation that continues to focus more on shareholder value and less on stakeholders will ultimately fail.

In our last installment of the “Transform your business” series, we’ll talk about Human Business Design.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8, Part 9, Part 10, Part 11.

There are no simple solutions to complex problems. In an enterprise, problems are interdependent; their solutions should be, too. Interdependent problems are systems of problems and their solutions must form a system. A system of solutions is a plan and all plans are complicated, almost never simple.

The reason why most management cure-alls and quick fixes fail is their neglect of the whole system and just focusing on one part of the system. These fixes part the whole system, treating it as an aggregation of independent parts. These manipulations typically fail because the performance of a system is not the equal to the sum of the performances of its essential parts taken separately, but the products of their interactions. For that reason, improvement of the essential parts of a system taken separately often does not improve and may reduce the performance of the whole. Another common deficiency is the failure of some quick fixes to take into account a social system’s developmental responsibilities to its stakeholders and the larger systems of which it is a part.

Let’s have a closer look at some of these fixes.

Downsizing

Downsizing fails more often than it succeeds. Within a short period of time after is implementation, costs tend to rise and serious morale problems usually emerge. Since many enterprise focus on shareholder value, the enthusiastic response of stock analysts often convinces the C-suite that they have made the right decision. I would argue, downsizing treats symptoms not the disease, thereby attacking effects, not causes. How come enterprises can lay off more than 10,000 employees and never realized in the months before the actual event that they employed more people than they need?

Enterprises are social organizations that are responsible for creating productive employment. Downsizing is a clear failure of living up to that promise. The principal source of excess personnel are bureaucratic monopolies within the firm. There are no economic indicators of the performance of bureaucratic monopolies. Neither the value of of their outputs nor their costs are generally known. Because their importance is judged by the size of their monopolies, they tend to grow as much as the subsidizer will allow. When it becomes apparent that a company is not as effective financially and competitively as it should be and is overemploying, downsizing is usually the first way out. But once it takes place, the bureaucratic monopolies continue to make work out of fear and grow as much as the system permits. And the vicious cycle continues.

And internal market economy is the most effective way is the most effective way of preventing or eliminating internal bureaucracies. An internal unit that has to compete against external resources must stay lean; it must eliminate or minimize excess personnel if it is to keep costs down to compete effectively.

Total Quality Management/Six Sigma

“Quality” as applied to products or services has come to be accepted as meaning “meeting or exceeding the expectations of customers.” “Total” quality should apply to all those who are affected by what an organization does: all its stakeholders. The objective of any system needs to focus on a quality organization, not only on quality products and services.

Enterprises can gain huge competitive advantages by focusing more on quality of work life and less on quality of products or services. Most employees/stakeholders regard Total Quality Management and Six Sigma as another path to exploit them, squeezing more out of them. On the other hand, when organizations strive to to improve the quality of work life, stakeholders will find new and innovative ways showing their appreciation. Quantity and quality of output will improve, even more when they are partners in quality improvement programs. Implementing quality improvement programs should be done from the bottom up, not directed by executives. It empowers all stakeholders and provides a feeling of ownership.

The biggest problem with Total Quality Management and Six Sigma is the failure to distinguish between efficiency and effectiveness. Meaning, it does not incorporate ethical or aesthetic evaluations of the products and services whose quality it attempts to improve .

Last but not least, continuous improvement involves relatively small incremental changes made close together in time. This precludes creative quantum leaps. Creative acts produce discontinuities, qualitative changes. Creative but discontinuous improvements are usually worth much more than a string of small but continuous improvements. More often than not, creativity is often discouraged in organizations because it so frequently is destabilizing and disruptive. Creative discontinuities are required to take the lead; continuous improvement is at best a way of getting closer to the leader. One cannot pass a leader by imitation.

In our next installment, we’ll talk about leadership and how to transform it.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8, Part 9, Part 10.

Image: Courtesy of 25.media.tumblr

Enterprises change at a breathtaking pace, reorganizing too often. Wasting a lot of time, energy, money and morale in the process. in the middle of a market tornado, enterprises try to reach a “stable state”. We would argue, enterprises should strive to reach a dynamic state. A state where adaption doesn’t equal reorganization. Such an organizational design is already being utilized.

The Multidimensional (MD) Design

The Multidimensional Design was originally developed at Dow Corning. It eliminates the need to reorganize when faced with a significant internal or external change.

The need to organize comes from the need to divide labor. To organize is to divide labor among different individuals or groups and to coordinate their activities in such a ways as to obtain a desired output. The more divided the labor, the more coordination is required. There are only three ways of dividing labor, meaning only three types of organizational unit:

a)    Functionally defined units (Purchasing, R&D, Industrial Relations, etc.)

b)   Product- or service-oriented output units (the magazines of a publishing company, the coffee of Starbucks)

c)    Market- or user-defined units (units defined by the geographic areas they sell in)

Most enterprises have all three types of units. Their importance is often ordered in the structure of most organizations. If product uniqueness is most important, then product-defined units dominate. If costs are the primary concern, functionally defined units rise to the top. All reorganizations involve changing the relative importance of the three criteria used in dividing labor, that is, changing the organizational levels at which units of the three types appear.

If units of all three types are established at a particular level of an organization, as their relative importance changes all that is required at that level is a reallocation of resources among them. Their reorganization is not required. Therefore, if the three types of unit are established at every level of an organization, the need to reorganize at any time is completely eliminated. Units of any of the three types can be added or subtracted without requiring reorganization; the organization’s structure remains the same.

Conventional representations of organizational structures do not indicate the interactions of the units. Three-dimensional representation of an organization makes it possible to show explicitly the interactions that should or do take place between units.

Product- or Service-Define Output Units

In a multidimensional organization, product- and service-defined (output) units consists of a management and only a small supporting staff, but no other personnel, and no facilities other than what is required to house this small staff of people. They are responsible for providing or arranging for all the activities required to make their products and services available to customers. These units obtain income from sale of their products and services. If they require more capital than they generate or accumulate, they can apply for it from a higher level of the organization. They are expected to treat such funds as loans or investments. They must pay for their use, one way or another.

Function-Defined Input Units

Units whose outputs are consumed primarily by other internal units are functionally defined , or input units. Functional units are often divided into two types, one defined as “operations” and the other as “service”. Operation units are ones that have a direct effect on the output (operations) of the organization, for example, manufacturing, maintenance, and purchasing. Service units have no such effect; they affect the nonoperational behavior of other units; they affect the nonoperational behavior of other units. Functional units are free to both purchase whatever they need and to sell whatever they produce or provide, either internally or externally. Their purchasing and selling decisions are subject to intervention from above and to compensation for such intervention when appropriate. They receive the income that their sales generate, and they pay the cost of whatever they purchase.

Market- or User-Defined Units

Market units – units that are defined by the users by the users they serve – have two complementary functions. First, they sell the outputs of any other unit in the organization that wants to use their services, as well as selling outputs externally. Second, market units also serve as advocates of the users in the markets for which they are responsible. They should not only represent the company in the market, but also the market in the company.

Market units evaluate the activities and outputs of other internal units from the point of view of potential and actual users of the organization’s outputs, who are outside of the organization and are affected by these outputs. For that reason, market units operate as consultants to the executive office and other unit heads.

Performance measures

A uniform, explicit, and operationally unambiguous measure of performance – which incorporates some function of the amount of profit generated, for example, return on capital employed – can be applied to units at every level, including the executive office. This makes possible comparison of the performances of units at all levels and discourages make-work and bureaucracy. However, profit is by no means the only important performance characteristic. Recall that in socially-systematically conceived organization, development of the organization, its stakeholders, and its containing system are its overriding objectives. Although profit is necessary for corporate development, it is not sufficient.

In our next installation, we discuss a plan being a system of solutions.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8, Part 9.

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For the sake of scaling, enterprises tend to create internal service divisions that are bureaucratic and monopolistic: Accounting, Procurement, R&D, Human Resources are usually run as subsidized monopolies. The pool that pays for their services is covered by an overhead charge imposed on the units served.

In general, subsidized monopolies are generally insensitive and unresponsive to the users of their services, but they are sensitive and responsive to those who subsidize them. Subsidizers are often not users of the service, hence less aware of the services’ deficiencies from the users’ point of view. In addition, bureaucracies try to ensure their survival by becoming as large as possible; they operate on the (not unreasonable) assumption that the larger they are, the more important they are and the more difficult they are to eliminate.

Centrally controlled corporations stimulate the increases in costs of internally provided products and services because the supplying units do not need to compare their costs and prices with those of external suppliers. How can you value a subsidized internal unit? It’s impossible. In a market controlled enterprise, users, not subsidizers, evaluate suppliers and express their evaluation in a way that counts – by their purchases.

As organizations of any kind become larger and more complex, the ability of centralized controllers to know all they need to know to manage their organizations effectively diminishes. Thats’s why an enterprise based on market economy works better in large systems: it disperses economic control among many enterprises that must compete with others in order to survive. And survival requires meeting or exceeding the expectations of customers and consumers.

Market Enterprise

A few requirements are important for an internal market economy to work within an enterprise:

• Every unit within the enterprise has to be either a profit center or a cost center that is part of a profit center that is responsible for the cost center’s performance. Profit Centers are not always expected profitable but they have to be accountable.
• Profit Centers have the freedom to buy any service or product they want from whatever source they want, and to sell their outputs to whomever they want at whatever price they want or are are willing to accept.
• A corporate unit that reduces the value of the corporation shouldn’t be part of it no matter how profitable it is when looked at separately. For that reason, the enterprise has the ability to intervene in a unit’s purchases and sales bot only when it benefits an organization as a whole.
• If there any executive reasons to buy services from internal resources even though outside suppliers are cheaper, the executive can force the unit to buy from within but has to pay the difference out of his own unit’s budget. This means that a selling unit will never have to sell its output at a price lower than it wants to and can.
• A manager doesn’t tell his or her subordinate units what to buy and sell unless a negative effect on other parts of the corporation or the corporation as a whole can be perceived.
• The executive units receives income from two sources: a) it charges for the operating and investment capital it supplies to subordinate units b) it imposes a tax on the profitability of each unit.
• Each profit center can accumulate profit up to a certain level that all stakeholders agreed on. Profits in excess of the specified amount will be passed up to the corporate level for its use.

Why a market enterprise?

Every enterprise unit operating within an internal market economy becomes a profit center. Therefore, for each unit the same success metrics can be applied. It allows managers to hone their skills better since they have a lot of autonomy and it gives each stakeholder an opportunity shine. Managers will be more concerned to get all the information they need to run a profitable unit and offering that information to other units to improve interactions.

The biggest challenge in implementing this system is the tendency of managers to withhold information. They fail to see that empowering all stakeholders might decrease their stranglehold on information and power but, at the same time, empowers all stakeholders to run a much more profitable organization. And an organization everybody is invested in. It is often recommended to remove managers that are more concerned with their own power base and not the overall health of the organization.

These managers often form connections with units that are unable to compete effectively or are no longer needed in the enterprise. While dealing with these challenges, the enterprise should never forget that without converting to a market enterprise, the whole organization might become extinct.

In the next installment, we will talk about organizational structures.

Previous installations can be found here: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7, Part 8.