Charles’ law

Is the business world similar to the natural one? Is it Darwin all over? Will more than 99% of the companies become extinct, just like the more than 5 billion species that ever lived on earth?

I hear you say no, not at all as most companies adapt and transform to survive. My memory tells me otherwise. I for one and probably you have worked in companies where transformation programs promised deep and fundamental change, just to realize 6 months later that the more things had changed, the more they had stayed the same. Changes in these companies become a cyclical phenomenon, whereby everybody ducks and holds on to their chair, till the winds of change quiet down, only to resurrect with the arrival of a new leader and the circus starts again.

So, if companies transform and survive, how do they do it?

Let’s first look at some traditional mistakes companies who fail to transform succumb.

The most common mistake companies make is changing the players without changing the context. True, you will have players that perform a little better and companies can even stumble upon the proverbial hero who manages to perfect the P&L. True, profit might increase marginally, shareholders might be happy for a day but nothing beyond the quarter has changed. For ninety-nine percent of the workforce, the change goes unnoticed, in their day-to-day job and in its financial and other recognition. Next quarter’s challenge is this quarter’s challenge: just add or subtract a couple of percentages. These companies burn CEO’s, CFOs, etc. and never get to the right team composition, etc. They believe companies are a one-man show and it only takes a great leader to transform a company.

The second most common illusion companies entertain is the belief that a different structure is required as a foundation and guarantee for fundamental change. These companies are likely to reorganize every so often, balancing between centralization and decentralization, hierarchical and flat structures, etc. These changes are nothing more than variations on a theme. I like to compare any traditional company structure to a maze. Replacing one maze with another might bring some temporal relief but is soon to reveal itself as another maze. Employees are very creative on how to overcome the challenges any maze brings but can’t escape the reality of living in a labyrinth. These companies burn so much internal energy that the customer becomes a necessary evil.

The third fallacy relies on the speed and depth of culture change. Based on the premise that great leadership drives different and performant behavior, culture change becomes a given and success automatically follows, right?  This usually is the case in pockets of the company but then you hit the wall of what one former executive I worked with called ‘the middle management permafrost’. Two or three levels down, where reality kicks in and the customer comes into play, changing the way things are done takes iterative improvement cycles, making change a step-by-step process, with minimal impact and hard to notice.  And 20 years on, the same culture is still around.

So, is change a fairy tale? Are most companies just rearranging the deckchairs on their proverbial Titanic? Why aren’t they imitating the successful newcomers on the block?

Let’s look at these young, fast-moving dynamic start-ups who rushed past the $1 billion revenue mark in no time. Latest count stands at 152 private such companies, with Uber coming 1st worth $68 billion (valuation in June 2016). Do they not dramatically change the world of work? Are these not the companies that have overcome the maze problem by organizing as networks, have they not overcome the management problem by giving associates the liberty to work when, where and how they prefer and have they not installed a great and performing culture of work? Isn’t that the fundamental change these companies like Airbnb bring?  or a company like WeWork, who’s raison d’être is ‘workspace, community, and services for a global network of creators’? Have they not changed the game?

I would argue not. Reading Petervan’s blog on ‘cogs in networks’, in which he wonders whether humans are becoming cogs in networks, just like the drivers for Uber, whereby extracting value from the network for the sole benefit of the monopoly results in squeezing the single driver, I see a 19th century industrial organization at work, where associates work ungodly hours for a meager compensation while the shareholder turns into a mogul. I would argue most newly formed companies, who are nothing but a platform, echo the 19th century organizational mentality and have not brought any change at all. These organizations have certainly not brought more humanity to work nor are they defining the future of work. On the contrary, we’re back in the age of monopolies and 19th century capitalism.

So if the newcomers are old school, then what? How do traditional companies adapt and survive?

In my view, successful fundamental transformation only occurs when a new market reality allows a stakeholder, primarily the customer, to impose a drastic power shift on all stakeholders of a company, forcing the company to fight for its survival. Today’s new market reality is mostly, if not only, driven by technology in one form or another.  When the company stakeholders do not accept the power shift in time, as in 99% of the cases, the company in its current setting doesn’t survive.  When they do, the company might survive but in the process will have to undergo a metamorphosis similar to a caterpillar transforming into a butterfly. Change only happens if it is the only option for all stakeholders. If not, it is purely cosmetic, trendy, superficial and serving a political purpose.

So, who is changing the world again?