Entrepreneurial management, Drucker wrote, requires very different managerial practices including (1) focusing managerial vision on opportunity; (2) generating an entrepreneurial spirit throughout its entire management group and (3) systematic listening to and interactions with the staff.[2]

“Today’s businesses, especially the large ones,” Drucker wrote in 1985, “simply will not survive in this period of rapid change and innovation unless they acquire entrepreneurial competence….Existing businesses will need to change, and change greatly in any event…And that they can only do if they learn to be successful entrepreneurs.”[3]

Drucker also foresaw a time when entrepreneurship and innovation would be “normal, steady, and continuous… innovation and entrepreneurship have to become an integral life-sustaining activity in our organizations, our economy, our society. This requires of executives in all institutions that they make innovation and entrepreneurship a normal, ongoing, everyday activity, a practice in their own work and in that of their organization.”[4]

Yet thirty years later, in many publicly-owned organizations, the pervasive shift to innovation and entrepreneurship that Drucker had foreseen hasn’t happened. As Larry Fink, CEO of BlackRock, the world’s largest investor, wrote in a letter to all the CEOs of Fortune 500 companies in February 2016: “Many companies continue to engage in practices that may undermine their ability to invest for the future… We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries that support strategies for long-term growth.”[5]

Why are firms failing to be entrepreneurial and invest in long-term growth? The answer isn’t hard to find. Once a firm embraces maximizing shareholder value and the current stock price as its goal, and lavishly compensates top management to that end, management naturally focuses on exploiting the existing business and bolstering the stock price by increasing dividends and share buybacks, at the expense of innovation and investing in the future.[6]

Sadly, the trend is increasing. “Dividends paid out by S&P 500 companies in 2015,” Fink wrote, “amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment.”

Even worse, shareholder value theory has joined forces with hierarchical bureaucracy. Once a firm embraces shareholder value theory, the C-suite has little choice but to deploy command-and-control management. That’s because making money for shareholders and the C-suite is inherently uninspiring to employees. The C-suite must compel employees to obey. With only one in five employees fully engaged in his or her work, and even fewer passionate, innovation and entrepreneurship are even less likely.[7]

Yet some firms have taken a different path. They have committed themselves to the kind of entrepreneurship and innovation that Drucker envisaged back in 1985. They have recognized that power in the marketplace has shifted from seller to buyer. These firms have seen that “better, cheaper, faster, smaller, more convenient, and more personalized” is the new norm, and the ability to innovate with committed employees is critical. These firms aim to generate an entrepreneurial spirit not only in the management group but throughout the entire organization.[8]

Even better news: firms that embrace entrepreneurship and innovation are handsomely rewarded by their customers and the stock market for doing so. The combined market capitalization of four firms alone—Apple, Amazon, Facebook and Google—now amounts to around $1.3 trillion.

Every aspect of business is changing. “Smartphones and tablets,” writes economist Geoffrey Moore, “are reengineering whole swaths of the consumer economy, from information access (Google) to communication (Facebook and Twitter) to media and entertainment (YouTube) to transportation (Uber) to hospitality (Airbnb) to dining (OpenTable and Yelp), and beyond.”[9]

And it’s not just firms in the digital economy. Whole Foods, Starbucks, Costco and Zara are using the same management practices in the non-digital world. Even big old firms, like Haier, Microsoft and Ericsson are also making the transition.[10]

“Traditional, MBA-style thinking,” as Eric Schmidt and Jonathan Rosenberg write in their book, How Google Works, “dictates that you build up a sustainable competitive advantage over rivals and then close the fortress and defend it with boiling oil and flaming arrows.” That doesn’t work anymore, because competitive advantages are less and less sustainable. The firm has to go on innovating, in order to be continuously successful.

Conclusion: Business is splitting two distinct groups: firms that are exploiting their existing business and firms that are continuously innovating. It is only the latter group that will survive: Peter Drucker’s message becomes even more urgent: innovate or die!

About the author:

Stephen Denning is the author of The Leader’s Guide to Radical Management (Jossey-Bass, 2010), which describes management principles and practices for reinventing management to promote continuous innovation and adaptation. Over 600 of his essays on these themes are available at: http://blogs.forbes.com/stevedenning/.

[1] Drucker, P. Innovation and Entrepreneurship, (1985) HarperCollins, pages 1, 14. Drucker also saw management as “about to make America into an entrepreneurial society,” with “social innovation in education, health care, government, and politics.”

[2] Ibid, pages 155- 157.

[3] Ibid. page 144. Drucker saw the needed entrepreneurship coming mainly from existing businesses, because they have the financial, human and managerial competence for effective entrepreneurial management.

[4] Ibid. Conclusion.

[5] Turner, M. “Here is the letter the world’s largest investor, BlackRock CEO Larry Fink, just sent to CEOs everywhere.” February 2, 2016. http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2

[6] Denning, S. “Maximizing Shareholder Value: The Dumbest Idea In the World,” Forbes.com, November 28, 2011. http://www.forbes.com/sites/stevedenning/2011/11/28/maximizing-shareholder-value-the-dumbest-idea-in-the-world/

[7] Hagel, J. Brown, J.S., Ranjan, A. & Byler, D. “Passion at Work.” October 7, 2014. http://dupress.com/articles/worker-passion-employee-behavior/

[8] Drucker, op. cit. page 157. In 1985, Drucker saw the entrepreneurial side of the organization being kept separate from operations: “the entrepreneurial, the new, has to be organized separately from the old and existing. Whenever we have tried to make an existing unit the carrier of the entrepreneurial project, we have failed.” Today, firms like Apple, Amazon, Google and Facebook make innovation and entrepreneurship an integral part of every part of the organization.

[9] Moore, G. “The Nature of the Firm—75 Years Later,” (2014); https://www.bbvaopenmind.com/en/article/the-nature-of-the-firm-75-years-later/?fullscreen=true

[10] Denning, S. “A Learning Consortium for the Creative Economy,” Forbes.com, November 20, 2015. http://www.forbes.com/sites/stevedenning/2014/11/20/exploring-innovations-in-management-through-a-learning-consortium/; Denning, S. “Surprise! Microsoft Is Agile.” Forbes.com, October 27, 2015. http://www.forbes.com/sites/stevedenning/2015/10/27/surprise-microsoft-is-agile/; Denning, S. “Microsoft: 16 Keys to Being Agile At Scale,” Forbes.com, October 29, 2015. http://www.forbes.com/sites/stevedenning/2015/10/29/microsofts-sixteen-keys-to-becoming-agile-at-scale/ Denning, S. “Can Industrial Giatts Reinvent Themselves?” May 13, 2013, http://www.forbes.com/sites/stevedenning/2013/05/13/the-creative-economy-can-industrial-giants-reinvent-themselves/; “Large Scale Agile At Ericsson” January 20, 2016, https://www.scrumalliance.org/why-scrum/learning-consortium/learning-consortium-webinars/large-scale-agile-at-ericsson

What then are the management practices of “the frictionless corporation” that enable “labor, information, and money move easily, cheaply, and almost instantly”?

Over the last year, a group of companies interested in finding out joined together to form a Learning Consortium for the Creative Economy, sponsored by Scrum Alliance, a membership association of more than 400,000 members with the mission of transforming the world of work.

Following nine site visits conducted during the summer and a retrospective review by the members, the group’s findings and recommendations are now available here and will be presented on November 6 at the Drucker Forum 2015. The session will be live-streamed (free registration here)

The most important finding of the Learning Consortium is that “changes in mindset are more important than changes in hardware or software.”

“Where the management practices and methodologies were implemented without the requisite mindset,” the Learning Consortium reports, “no benefits were observed.” When technology is deployed with traditional mindsets, the organization is not agile enough to exploit it. To succeed, management must draw on the full talents and capabilities of those doing the work.

The key message of the Learning Consortium, writes Andrew Hill of the Financial Times, is to “set staff free without plunging them into chaos.”

Enlightened managers, “in some traditional-looking companies are already shaking up their approach without drama… Basic changes include the switch from rigid five-year plans to adaptable rolling strategies; or the use of a military-style mission-command approach, where chiefs set a goal and allow frontline troops to work out how to reach it rather than dictating every step.”

The Learning Consortium, writes Hill, has “come up with several useful snapshots, after visiting each other’s operations to observe these new practices. They found, for instance, that self-managed teams were not just tiny curiosities. They could scale up to handle complex cross-border work. Ericsson — hardly a fresh-faced start-up at nearly 140 years old — has given autonomy to 2,300 engineers in 110 teams, co-ordinated from Athlone, Ireland, to produce enterprise software for huge telecoms operators.”

“Microsoft, latterly a byword for how bureaucracy can bury innovation, has made similar strides. At its development division in Seattle, 4,300 staff make applications for software developers, working in a way that would put Google to shame. Open workspaces are in and individual offices are out; so are top-down programmes that shackled everyone to a sluggish two-year release timetable.”

A detailed account of the Learning Consortium’s site visit to Microsoft is available in two articles here and here.

The site visits changed the members’ image of Microsoft, which was less like the giant battleship they had expected and more like “a flotilla of speedboats operating and maneuvering in an orchestrated fashion.”

“Although there were many variations observed during the site visits,” the report says, “the Learning Consortium observed a striking convergence towards a set of management goals, principles and values that are markedly different from the management practices of hierarchical bureaucracy that is still pervasive in large organizations today. Although there was no ‘one size fits all’, the site visits revealed a family resemblance among the goals, principles and values of the companies visited.”

The mindset includes:

• Goals, attitudes and values that focus on added value and innovation for customers and users, rather than a preoccupation with short-term profits.
• Managers seeing themselves, and acting, as enablers, rather than controllers, so as to draw on the full talents and capacities of knowledge workers.
• The use of autonomous teams and networks of teams, in some cases operating at large scale with complex and mission-critical tasks.
• The coordination of work through structured, iterative, customer-focused practices, rather than bureaucracy.
• Embodying on a daily basis the values of transparency and continuous improvement of products, services and work methods.
• Communications that are open and conversational, rather than top-down and hierarchical.

“Individually, none of the observed management practices are new,” the report says. “What is new is the way that the new management goals, practices and values constitute a coherent and integrated system, driven by and lubricated with a common leadership mindset.”

“The leadership principles that were observed in these site visits are not a random collection of fixes. They fit together as a mutually reinforcing set of management patterns. Once an organization or unit embraces the leadership mindset, and pursues it consistently over a period of time, it affects everything in the organization—the way it plans, the way it manages, the way people work. Everything is different. It changes the game fundamentally.”

“Another universal feature of the site visits to organizations where the goals, principles and values are being successfully pursued is strong leadership. This was not only true in organizations that were in transformation from an entrenched legacy culture of hierarchical bureaucracy, where courageous championing of the different goals, principles and values is a sine qua non of progress in overcoming an adherence to the status quo. It was also true in newer organizations that were founded from the outset with the goals, principles and values of the Creative Economy, where continuous championing and vigilance are seen as necessary to preserve the organizational culture, and to prevent reversion to hierarchical bureaucracy, especially as the organization grows.”

Members of the Learning Consortium will be on hand at the Drucker Forum session to share and discuss the Consortium’s findings including: Richard Sheridan, Chief Execuive Officer of Menlo Innovations, Ahmed Sidky: Director. Development Management at Riot Games, Paul Madden, Head of Product Development, in Ericsson Athlone, Ireland, Chad Lindblom, Chief Information Officer, CH Robinson International and Thomas Juli, Senior Manager HR Organizational Development of Magna International.

About the author:

Steve Denning’s latest book is The Leader’s Guide to Radical Management. He is also the author of The Leader’s Guide to Storytelling, The Secret Language of Leadership, and a regular blog on Forbes.com.

Yet despite almost a century of fine management writing and many successful initiatives, the ugly truth is that the lasting impact on general management practice has been limited. Even humanist change initiatives that were dramatically successful by objectively measured standards have often been discarded by the firms that introduced them. Sooner or later, firms revert to stultifying bureaucratic practices, as if on some zombie-like automatic pilot.

Many large publicly-owned corporations continue to implement hierarchical bureaucracy and, since the 1980s, pursue the goal of maximizing shareholder value as reflected in the stock price, despite steadily declining returns on assets and on invested capital. The problem is not so much excessive focus on quantitative metrics or technocratic logic, but rather failure to respond to obvious quantitative truths staring managers in the face.

Achieving humanistic management has thus turned out to be a much more intractable problem than most thought leaders expected it to be. Instead of management comprising linear mechanisms that could be improved one-by-one through implementing proven remedial measures, it has acted more like an ingeniously morphing virus that steadily adapts itself to, and ultimately defeats, intended fixes and returns to its original state, sometimes more virulent than before.

Why is change so difficult? One reason is that an unholy alliance links shareholder value theory and hierarchical bureaucracy. Once a firm embraces maximizing shareholder value and the current stock price as its goal, and lavishly compensates top management to that end, the C-suite has little choice but to deploy command-and-control management. That’s because making money for shareholders and the C-suite is inherently uninspiring to employees. The C-suite must compel employees to obey. The result is that only one in five employees is fully engaged in his or her work, and even fewer are passionate. The very foundations of humanist management—collaboration and trust—are missing.

The good news is that the Internet is now forcing change, by:

• Shifting power in the marketplace from seller to buyer. Customers, who have access to reliable information about the available choices and a capacity to interact with other customers, are now collectively in charge.
• Raising customers’ expectations. As “better, cheaper, faster, smaller, more convenient, and more personalized” became the new norm, the ability to innovate with committed employees became critical.
• Requiring firms to draw on the passion and full talents of those doing the work to find ways to delight customers.
• Shredding vertical supply chains, as customers can buy a wider array of stuff online cheaper, and often quicker, than in a physical store.
• Spawning vast new horizontal value chains, in which millions of people began creating their own virtual meeting places and marketplaces with their own lateral economies of scale.
• Enabling firms to create huge ecosystems of contractors and customers that can achieve scale without the sclerosis of hierarchical bureaucracy.

These shifts require not just increased attention to customers by strengthening the marketing department or introducing rah-rah employee engagement programs. They require rethinking the fundamentals of management.

The foundation is Peter Drucker’s insight of 1973: the only valid purpose of a firm is to create a customer. It’s through providing value to customers that firms justify their existence. Profits and share price increases are the result, not the goal of a firm’s activities.[1]

The locus of competitive advantage is now determined by interactions with the customer, built on the work of engaged and passionate workers. The central strategic questions of the industrial model, “How much more can we sell?” and “How much money can we make?” are replaced by “Why should customers buy from us,” and “What else do customers need?”

As Ranjay Gulati notes in Reorganize for Resilience (2010), it means orienting everyone to the goal of delivering more value to customers sooner, and aligning all decision-making with this goal. It is a shift in mindset from “You take what we make,” to “We seek to understand your problems and will surprise you by solving them.”

While armies of dispirited bureaucrats, driven by command-and-control, simply can’t get this job done, the enabling management practices and metrics of humanistic management are well suited to it. When the goal is the inherently inspiring goal of delighting customers, managers don’t need to make employees do their job. With managers and workers sharing the same goal—delighting customers—the humanistic management practices of trust and collaboration become not only possible but necessary.

To be sure, other changes wrought by the Internet bring new challenges that must also be dealt with. Increasing income inequality must be addressed with more progressive tax policy. Excessive financialization of the economy must be resolved by reining in the financial sector. Abuses of burgeoning monopolies must be met with stronger anti-trust action. Threats to privacy must be averted by appropriate regulation. The rights of vast numbers of part-time workers and “permatemps” must be protected through appropriate legislation. Education systems must support greater entrepreneurial skills and life-long learning to prepare people for the new world of work. Greater support must be provided for individuals to start their own businesses.

But the most important battle in the war for humanistic management—compelling firms to respect customers and employees as human beings—has already been won. The choice for organizations today is: change or die.

About the author:

Stephen Denning is the author of The Leader’s Guide to Radical Management (Jossey-Bass, 2010), which describes management principles and practices for reinventing management to promote continuous innovation and adaptation. Over 600 of his essays on these themes are available at: http://blogs.forbes.com/stevedenning/.

[1] Drucker, P. Management: Tasks, Responsibilities and Practices, Heinemann, 1973.

Complexity is not a new condition. While it’s true that many aspects of life have become more densely connected and unpredictable, the fact is that our world is inherently complex. Most of the environments we move in and tasks we perform require us to deal with interdependent and dynamic phenomena.

Consider (as economists Andrew Haldane and Vasileios Madouros recently did) the seemingly simple task of catching a Frisbee. It requires the resolution in real-time of two infinitely variable factors: the Frisbee’s trajectory and the catcher’s own movement. So how do people – and even dogs – routinely manage it? Not by gathering waves of data and solving successive equations. Instead, people (and dogs) learn to rely on a simple method that works most of the time: they run in such a way that their angle of gaze to the Frisbee remains roughly constant.

What allows a Frisbee player to dash forth with confidence is, in other words, a heuristic. And heuristics, or rules of thumb, are also what allow people in all kinds of situations – including fast-changing business environments – to forge ahead rather than being paralyzed by complexity. Managers under pressure to make many decisions can’t subject every one of them to thorough and dispassionate analysis. They rely to a large extent on what has worked in the past.

The full blog post can be found at: http://blogs.hbr.org/cs/2013/06/making_management_as_simple_as.html

In my TEDx talk in Oslo last month, I explained in more detail why the transition to Management 2.0 is not merely desirable: it is inevitable.

In the talk, I examine the epic shift in power in the marketplace from the seller to the buyer, that flows from Peter Drucker’s foundational insight in 1973: “There is only one valid definition of business purpose: to create a customer.”

The shift in power has had devastating consequences for hierarchical bureaucracies, which have been insufficiently agile to cope with the more dynamic marketplace. They have experienced steadily decreasing returns on their assets and on invested capital.

By contrast, firms such as Apple [AAPL] and Salesforce [CRM] that have focused totally on delighting the customer have been hugely profitable.

Management 2.0 amounts to a paradigm shift in the strict sense of the phrase as used by Thomas Kuhn: a new mental model of the world and how management operates within it.

Because it generates markedly superior profitability as well as a more satisfying workplace and a more congenial experience for customers, the question is not whether it will happen, but when.

A full transcript of the talk is available here.

AUTHOR:
Steve Denning’s latest book is The Leader’s Guide to Radical Management (Jossey-Bass, 2010). It describes management principles and practices required to reinvent management to promote innovation and adaptation. He is also the author of The Leader’s Guide to Storytelling (2011) and The Secret Language of Leadership (2007). His website is www.stevedenning.com and his Forbes column on radical management is at http://blogs.forbes.com/stevedenning/.

1. The management mindset
2. The role of managers
3. The way work is coordinated
4. The values practiced and
5. The way people communicate.

Five fundamental shifts in management practice

Shift #1: Management mindset: From inside-out to outside in
To accomplish the transition to customer capitalism, reflecting the shift in the balance of power in the marketplace from seller to buyer, firms must change from an inside-out mindset (“We make it and you take it”) to an outside-in mindset (“We seek to understand your problems and will surprise you by solving them”).  As Ranjay Gulati notes in Reorganize for Resilience (2010), the shift goes way beyond strengthening customer service: it means orienting everyone and everything in the firm to the goal of delivering more value to customers sooner, and aligning all decision-making with this goal.

The shift was foreshadowed in 1973, by Peter Drucker: “There is only one valid definition of business purpose: to create a customer.” To create a customer today, an organization must do more than satisfy the customer: it must continue to innovate and meet needs that the customers may not even know that they have. Time assumes a new importance: if value can be delivered sooner, it is more likely to generate delight. Examples: Apple, Amazon, Zappos.

Shift #2: The role for managers: From controller to enabler
Focusing on continuously adding new value for clients requires a change in the way work is carried out, Hierarchical bureaucracy is not well adapted to innovation, as work is increasingly knowledge work and tight control stifles the key ingredients of today’s productivity: worker passion and creativity.

 
To reach the new level of performance, the organization has to empower those doing the work, so as to facilitate collaboration, rapid learning and innovation. The result is a dramatic shift in the role of the manager from controller of individuals to an enabler of self-organizing teams. Instead of the workers reporting to managers, the managers are in effect accountable to those doing the work, both for setting direction and for removing any impediments that are hindering the work. This reversal of the polarity recognizes that the engines of productivity, innovation and creativity resides in the energy and ideas of the people doing the work, working together across boundaries, drawing on new technology, to become more productive and innovative. Examples: Morning Star, W.L. Gore & Associates.

Shift #3: Coordinating work: From bureaucracy to dynamic linking
Hierarchical bureaucracy coordinates work through the use of detailed plans, rules and reports. Management specifies both the goal and the methods for achieving that goal; progress is systematically tracked by reports to managers. The approach achieves disciplined execution with scalability but is insufficiently agile for today’s rapidly shifting marketplace.

 
Meshing the efforts of autonomous teams with client delight while also achieving disciplined execution requires a set of measures that might be called “dynamic linking,” The method began in Japan, was outlined in a 1986 HBR article by Professors Nonaka and Takeuchi entitled “The New New Product Development Game”, and has since been most fully developed in software development with methods known as “Agile”, “Scrum,”  and “Kanban”.

 
“Dynamic linking” means that (a) the work is done in short cycles; (b) the management sets the goals of work in the cycle, based on what is known about what might delight the client; (c) decisions about how the work is to be carried out to achieve those goals are largely the responsibility of those doing the work; (d) progress is measured (to the extent possible) by direct client feedback at the end of each cycle. Example: Salesforce.

Shift #4: What really matters: From economic valueto values
Given its goal of making money for shareholders, hierarchical bureaucracy was preoccupied with economic value and efficiency, rather than values. A preoccupation with shareholder value encouraged firms to cut costs and eliminate what was key to generating the future. Management 2.0 rests on values that are aligned both with delighting the customer and inspiring autonomous teams to contribute their best. They include radical transparency, continuous improvement and sustainability. Example: Whole Foods.

Shift #5: Communications: From command to conversation
Management 2.0 requires that managers elicit the energies, imagination, and creativity of those doing the work. This means communicating predominantly in the language of peer-to-peer, competence-based, adult-to-adult, horizontal conversations. This contrasts with hierarchical bureaucracy where communications are typically impersonal, top-down, authority-based and adult-to-child. In Management 2.0, communications tend to be in the form of stories, metaphors and open-ended exchanges of views. Example: Intuit, Bridgewater Associates.

Bottom line: alignment
None of these five shifts is new in itself. What is new is putting all five shifts into operation at once.  The agenda is challenging but it offers significant benefits. When well executed, it generates simultaneously high productivity, continuous innovation, disciplined execution, greater job satisfaction and client delight.

 
The shift entails more than a change in management practices: it amounts to a revolutionary shift from an ecosystem in which workers and customers are manipulated as things to an ecosystem in which workers and customers are interacted with as human beings.

AUTHOR:
Steve Denning’s latest book is The Leader’s Guide to Radical Management (Jossey-Bass, 2010). It describes management principles and practices required to reinvent management to promote innovation and adaptation. He is also the author of The Leader’s Guide to Storytelling (2011) and The Secret Language of Leadership (2007). His website is www.stevedenning.com and his Forbes column on radical management is at http://blogs.forbes.com/stevedenning/. This post draws on Steve’s article, “Reinventing Management: the practices that enable continuous innovation,” in Strategy & Leadership, 2011, Volume 39, Number 3, 2011.