Dave Ulrich, professor at the University of Michigan Ross School of Business, argues today’s companies need to replace old hierarchical models with he calls a “market-oriented ecosystem.” From research at Alibaba, Google, Huawei, Supercell, and others, he shows the impressive results of orienting teams and processes toward market opportunities. Ulrich is the coauthor, along with Tencent senior advisor Arthur Yeung, of Reinventing the Organization: How Companies Can Deliver Radically Greater Value in Fast-Changing Markets.
URT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
The traditional hierarchical organization – we all know – has served its purpose. Scale? It did that well. Speed was another thing.
Nowadays, the agile organization, the networked organization, or even holacracy, offer a competing models for running a company. What type of organization is going to prove superior at scale and speed?
To answer that question, our guest today studied and visited some of the biggest and fastest companies out there, firms like Google and Amazon in the United States, DiDi and Alibaba in China, and Supercell in Europe.
And the research reveals a blueprint for what makes these companies so successful. Our guest calls them “market-oriented ecosystems.” He’s here today to tell us what makes them tick.
Our guest is Dave Ulrich, a professor at the University of Michigan Ross School of Business. He’s the coauthor, along with Arthur Yeung, a senior advisor at Tencent, of a new book. It’s called Reinventing the Organization; How Companies Can Deliver Radically Greater Value in Fast-Changing Markets.
Dave, thanks for coming on the show.
DAVE ULRICH: Curt, what a privilege to be with you. Thank you for inviting me.
CURT NICKISCH: What is wrong with the existing image of a winning company?
DAVE ULRICH: You know, if we ask people to draw an organization and say, take out a sheet of paper, draw an organization, almost always what we get is some form of hierarchy. And that’s the mental model. That’s the bias that we have. The problem with those organizations is they were built for clarity of role, and for clarity of accountability. Who do I report to? Who do I, who does that person report to? Those organizations are great in a world of stability.
Unfortunately, that’s not our world today. Who knows what tomorrow’s going to hold? There are enormous changes and dramatic changes in almost part of our lives. And so, those hierarchical organizations simply don’t respond. And as a result, you see a litany of organizations that have existed for many years failing
CURT NICKISCH: So, you two went out and looked at companies like Alibaba, Amazon, DiDi in China, Facebook, Google, Supercell, and Tencent, why did you pick those out? And I’m also curious what you saw, and what you learned by going there.
DAVE ULRICH: Curt, as you well know, it’s always tricky to pick companies who are iconic today because they may not be iconic tomorrow. And so, we’re worried about that. But we wanted to pick companies that seemed to have created kind of the neoclassic, the newly organized companies.
And so, we said what’s going on in China? You have three kinds of organizations. You have state owned enterprises that are the large hierarchies, you have multi-national companies that take ideas from the West in general, and move them into China. And then between those extremes you have private owned enterprises. These are the companies you just talked about, Tencent, Ali Baba, Supercell’s actually from Finland, but these companies have just exploded in the last 20 years.
They have some of the highest market caps in the world, they’ve scaled innovation, they’ve moved rapidly, and they’re not hierarchically driven. And then in the U.S., we found companies in the technology sector like Google, and Amazon, and Facebook, who’ve also exploded.
These companies have an average age of 20 years, and they have an average market valuation of $400 billion. I mean, holy smokes that’s incredible.
And when we got into those companies in some detail with extensive kind of case studies, we began to recognize there’s some common things that they seem to do that allow them to move as fast as the market requires.
CURT NICKISCH: I have to ask this. When you, after your career, go into these companies, like what was so striking about it to you?
DAVE ULRICH: Between a hierarchy on the left hand, and a holding company on the right hand, is what we discovered in these firms. They’re market-oriented, so they go after market opportunities. And then they have cells, like a holding company. So, Amazon has Whole Foods, it has Fire, it has cells. But the cells are connected to each other. In a holding company, the cells operate independently. In an ecosystem, the real strength is the relationships between those separate cells.
CURT NICKISCH: It seems like understanding the relationships between all of those elements in an ecosystem are what’s so difficult because a company that is market oriented can look out and see lots of different things that it could go after. And so, just understanding more than just supply and demand of a product, but understanding the ecosystem is really the tricky part.
DAVE ULRICH: It is very tricky. The interesting part is how do you connect those cells to each other. One of the things we found is that there were four what we call capabilities. A capability is what the organization is known for and good at doing.
Marriot is defined for exceptional service, Disney is defined for exceptional guest interface, or customer relations. Well, what we’re finding now is in this market-oriented ecosystem, the capabilities are embedded in the network.
So, you have a company with eight or ten cells in Amazon, working in different parts, different businesses, different markets. The question then is how do they connect with each other? They connect with each around four capabilities. External sensing, or sharing information, customer anticipation, innovation, and being innovative all the time, and agility.
So, what happens in these ecosystems if you have a vision with a platform in the middle, that’s the hub, then you have cells, and so draw the hub and spokes, but then connect those cells to each other around four things: External sensing, what’s happening in your marketplace, customers, innovation everywhere, not just in the product, but in the business model and service, and then agility, how do we move quickly to make that happen.
CURT NICKISCH: What do products look like in that kind of environment? What are those CEOs coming up with, and creating, that other companies aren’t?
DAVE ULRICH: All kinds of creative products. So, I’ll use Amazon, which is a popular example in North America, but I think those outside North America would see it. So, Amazon, sometimes you buy a new cell, or you can build it. Amazon buys Whole Foods. And for those not from the United States, it’s a grocery store, food store, brick and mortar
So, Amazon says, we seem to know what people are buying from the online distribution system that we’ve got, because we have information by postal code about what people are buying. We then can go in with that information, that’s the capability.
And in a Whole Foods store in that postal code, begin to put specific products or items that customers in that postal code are more likely to buy. So, we’re sharing information from one part of Amazon, which is the online sales, the e-business, with the brick and mortar business. By the way, this sounds so obvious. I see this and I go, duh.
But it’s not been done because we have models that well, the brick and mortar business is in one business unit, and the online business is in another. And to make the decisions across you have to climb the hierarchy, and then you have to climb down the hierarchy. No, you build these cells, and you connect them with information, and customers, and innovation, and agility, that allows them to create services customers value.
CURT NICKISCH: I think a lot of people have the sense that these massive organizations like Amazon, or Alibaba, or Google, have a special sauce, and they have economies of scale. And you’re describing something different here. They may have that IP, and they may have economies of scale, but they’re also applying it in new ways that other companies aren’t, it sounds like?
DAVE ULRICH: Absolutely. I mean, it’s interesting to watch the big companies who are struggling, or have struggled. The companies like Sears, the companies like Toys R Us. Companies that have had economies of scale on the supply chain, but they didn’t have the capacity to reinvent themselves through this market-oriented ecosystem.
Some of these neoclassic companies are moving so quickly into new markets, and then sharing information to try to build this incredible agile, or flexible company. And we see it as a great opportunity not only for the company to win in the marketplace, but for employees.
I am an employee in a company, I’ve got a great idea, what do I do with that idea. Well, often because I’m in a hierarchy and I have to go through six or seven levels of approval, I’ve got a great idea at Facebook, or at Amazon, or at Tencent, or at Alibaba.
If there’s an opportunity for that idea, the answer is go form a cell, go become an internal venture capital firm, go create something, and if it begins to work, begin part of an ecosystem so that I get support for that idea, and can expand it.
CURT NICKISCH: What’s an example from a Chinese company that you think is just a really great model of market orientation, and how a company has leverage the ecosystem that they’re in?
DAVE ULRICH: At Tencent, one of the things they’ve done is recognize Tencent’s platform is information, and knowledge, and building relationships. They get into WeChat, they begin to know what consumers want, they get into JD.com, which is a food distribution, and an online food distribution store, and so the knowledge from We Chat can transfer to what JD.com can do.
They can begin to recognize those four capabilities, information, external sensing, what’s happening in the world, customers, what are customers buying, much like the Amazon example, innovation, how do we innovate our products, and services, and business model, and agility, how are you able to move quickly and focus on the future, what can we learn from that? And Tencent has done that brilliantly with WeChat, and with JD.com.
CURT NICKISCH: So, what gets in the way of doing this?
DAVE ULRICH: I think one of the things that gets in the way is our mental model. I think we carry unconscious biases about what does an organization look like, and how does it work, and so, I think sometimes what gets in the way is the leaders of the organization saying it’s not about power. The leader’s job in this organization is not about what do I control, but how do I empower others?
And that mental model of what an organization is, it’s about power, it’s about control, it’s about clarifying decision rights, in this organization it’s more about agility, customer, innovation, and moving to penetrate market opportunities. I think that mental model of an organization as a control system has basically got to shift.
CURT NICKISCH: Yeah. Do you think the bias against changing those things, or the bias against seeing culture in a new way is stronger at the top, or at the bottom?
DAVE ULRICH: I mean, yeah, change is hard. One of the fun exercises we love to do is say to people, fold your arms, and fold them the other way. Something as simple as a three-second exercise. I fold my arms, I fold them the other way. Habits, many have studied habits in ways. And it’s 70 to 80 percent of what we do.
We love habits, we love routines. When we wake up in the morning we have habits, when we drive to work we have habits. Those habits sometimes get ingrained and almost become barriers to change.
And so, and I think culture is one of those things. We get a definition of culture, and when we’ve tried to articulate culture is not the roots of the tree, it’s the branches of the tree, some of the people go crazy. You’re mis-defining culture. And my comment back is, we’re pivoting the definition of culture. Like the definition of leadership has changed, the definition of strategy has changed.
I think we’ve got to continually evolve and learn, and our definition now of organization is changing. And I think it’s nice. We’re not getting away and saying, the hierarchy was bad. The hierarchy was terrific in its time. And today what worked in the past will not work in the future. And we’re trying to reinvent that logic.
CURT NICKISCH: How does managing workers differ in one of these organizations?
DAVE ULRICH: So, if I were to ask somebody, when you think traditionally of the manager and subordinate, how would you draw that on a chart. And often people would put the manager, or the boss, at the top, and then the subordinate below.
In these organizations, there’s still a form of control, the manager is the manager. But you’d almost put them side to side. The manager’s job is not to exert power. The manager’s job is to empower. And so, by the manager giving the employee knowledge, and information, and competence, and authority that then goes with that, the employee then feels empowered about what he or she can do.
Leadership is about making others better, not just doing the work by yourself. And we find good leaders in those organizations need to learn some of those skills.
CURT NICKISCH: Part of what you focus on in the book is not just the internal culture and structure, but also how the organization connects to the outside world. How do managers and leaders change that?
DAVE ULRICH: You know, one of the things that we believe is that content is king. You’ve got to have, or you’ve got to have content, you’ve got to have the right product, the right service. And if you don’t have good content, you’re going to go out of business.
I think that’s, you know, Eastman Kodak, they were the best filmmaker in the history of the world, and Fuji, and Eastman Kodak. Content is king, but context is the kingdom. The context is changing. In fact, one of the things we found is there’s a liability of success. And I don’t want to beat on Kodak because I think they were filled with great employees, but because we’re so good at making a three-foot piece of acetate one inch wide, we get locked into that as the solution. Context is the kingdom. Where does my content as king need to play?
Well, the context is changing. We see dramatic change in we have six areas we look at. We look at social trends are changing, technological trends, heaven forbid, but a big circle around that. The artificial intelligence, robots, changing the world we live in so dramatically. Economic trends are changing, industries are growing, and shrinking, and how we deal with competitors.
Political trends are changing in dramatic ways around the world with nationalism right now being one of the issues. But other political trends, and legislative roles, environmental trends, social responsibility, and obviously demographic trends in people. When we understand that context of the social, technical, economic, political, environmental, and demographic trends, we can begin to anticipate what might come next.
CURT NICKISCH: You’ve talked about how these organizations go after new opportunities. Find them, communicate them, across the organization, and across cells, and then build on each other.
Part of that is also letting go of things that aren’t working, and part of agility is dropping things rather than just moving to where the market’s going. How do you recommend managers and leaders, or how have you seen managers and leaders in these organizations handle that side of the equation?
DAVE ULRICH: We’ve worked with companies that we looked at here, and elsewhere, and have had a four-phase mantra. Think big, anticipate that opportunity, see the environmental opportunity. Number two, test small. That’s the cell, go test. And number three, fail fast. And number four, learn always.
Where we see companies often making a mistake, think big, test small, fail fast, learn always, is the third. We stick with something too long, and so, it becomes critical that a company, the MOE, the market-oriented ecosystem we advocate, have great ideas. What’s the opportunity in the future? Test small, go form a sale, fail fast, set some criteria.
Is this really working? Is it not working? And the criteria is not brand new. Are customers buying the product? Are they accepting the agenda we’ve got, is there revenue? And put deadlines on that. Put benchmarks on that.
So, after six months, or after a year, if our product isn’t working or selling as much as we like, we’re going to pull back, but we’re not going to quit because the whole purpose of an ecosystem is to learn always. So, we’re going to share knowledge and information with others in that ecosystem not only about what worked, but what didn’t work.
CURT NICKISCH: You also have this counterintuitive idea in there that even in these market-oriented ecosystem companies, they have consistent priorities. And so, I’m just curious how these companies keep some things constant, and kind of front and center when it seems like everything else is moving so quickly?
DAVE ULRICH: Think of the hub and spoke, and then the spokes are connected to each other. So, what does the platform or the hub do? It makes sure that everyone in the ecosystem has a shared set of values or principles. And so, no matter how you go to market in whichever cell, we teach the business leaders the correct principles, and they live against that. We standardize around values, and principles, but your practices may be different depending on the marketplace you’re trying to go into.
It’s easier to apply these principles in a green field, where you’re starting fresh, and the companies we looked at mostly did that. And boy, if companies like Kodak, that I mentioned, or Toys R Us, or Nokia, had understood these principles, they still may have failed. I’m not naïve about that. But maybe they would have had a better shot at reinventing themselves to win in the context in the future market opportunity.
CURT NICKISCH: Dave, thanks so much for coming on the show to talk about this, and share your research, and what you saw.
DAVE ULRICH: I appreciate it.
CURT NICKISCH: That’s Dave Ulrich. He is a professor at the University of Michigan’s Ross School of Business, and the co-author of the new book Reinventing the Organization: How Companies Can Deliver Radically Greater Value in Fast Changing Markets.
This episode was produced by Mary Dooe, we get technical help from Rob Eckhardt, Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast, I’m Curt Nickisch.
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