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The Future of Management (Excerpted From Chapter 2)

February 7, 2008
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The Power of Management Innovation

Over the past few years, I, along with two of my colleagues at the London Business School, have been examining the history of management innovation. To date, we have studied more than 100 management breakthroughs, stretching across two centuries. One inescapable conclusion: major advances in management practice often lead to significant shifts in competitive position, and often confer long-lasting advantages on pioneering firms.

Consider, for example, a few of the 20th century’s most consistently successful companies: General Electric, DuPont, Procter & Gamble, Toyota, and Visa. What is it that propelled these companies to positions of global leadership? Of course, the usual suspects—great products, disciplined execution, and farsighted leaders—played a role. But if you dig deeper, you discover that it was management innovation, first and foremost, that set them on the course to greatness:

Managing science. In the early 1900s, General Electric perfected Thomas Edison’s most notable invention, the industrial research laboratory. GE’s success in bringing management discipline to the chaotic process of scientific discovery allowed Edison to claim that his labs were capable of producing a minor invention every 10 days and a major breakthrough every six months. This was no idle boast. Over the first half of the 20th century, GE won more patents than any other company in America.

Allocating capital. DuPont played a pioneering role in the development of capital-budgeting techniques when it initiated the use of return on investment calculations in 1903. A few years later, the company also developed a standardized way of comparing the performance of its numerous product departments. These advances addressed a pressing problem: How to allocate capital rationally when confronted with a bewildering array of potentially attractive projects? DuPont’s new decision tools would help it to become one of America’s industrial giants.

Managing intangible assets. Procter & Gamble’s pre-eminence in the packaged goods industry has its roots in the early 1930s, when the company began to formalize its approach to brand management. At the time, the idea of creating value out of intangible assets was a novel idea. In the decades since, P&G has steadily built upon its early lead in building and managing great brands. In 2007, P&G’s business portfolio included 16 brands that were delivering more than $1 billion in annual sales.

Capturing the wisdom of every employee. Toyota is the world’s most profitable carmaker—by a long margin. Much of its success rests on an unmatched ability to enroll employees in the relentless pursuit of efficiency and quality. For more than 40 years, Toyota’s capacity for continuous improvement has been powered by a belief in the ability of "ordinary" employees to solve complex problems. Indeed, people inside Toyota sometimes refer to the Toyota Production System as the "Thinking People System." In 2005, the company received more than 540,000 improvement ideas from its Japanese employees.

Building a global consortium. Visa, the world’s first "virtual" company, owes its success to organizational innovation. When Visa’s founding banks formed a consortium in the United States in the early 1970s, they laid the groundwork for what would become one of the world’s most ubiquitous brands. The key management challenge: building an organization that would allow banks to compete for customers while collaborating around infrastructure, standards, and brand-building. Today, Visa is a gossamer web that links more than 21,000 financial institutions and 1.3 billion cardholders. The Visa network processes more than $2 trillion of purchases every year—about 60 percent of all credit card transactions.

These cases (as well as more recent ones, which we will explore in subsequent chapters) highlight the decisive role that management innovation often plays in helping companies build durable advantages. Indeed, no other factor seems to have been similarly instrumental in underwriting long-term competitive success.

This assertion, bold as it may seem, is buttressed by the findings of military theorists who’ve explored the origins of sustained superiority in war making. Here, too, management innovation seems to be key. In battle, as in business, most victories are pyrrhic and temporary. Yet here and there, in the bloody pages of history, one observes a military regime that has consistently bested its enemies, often despite a deficit of men and matériel. As you might imagine, these cases are of great interest to military scholars who, like business school professors, have an interest in uncovering the deep roots of competitive advantage. Why is it, these analysts ask, that some armies and navies have enjoyed prolonged periods of military supremacy?

When confronted with this question, a layperson is likely to credit superior weaponry. Prime exhibits might include:

The deadly and much-feared yew-wood longbow, which, in the 14th century, allowed the archers of King Edward III to deal out a series of crushing blows to England’s enemies

The agile and speedy three-masted caravel, a product of 15th century Iberian ingenuity, which gave European powers a sizable advantage in building their globe-spanning empires.

The breech-loading needle gun, perfected in the mid-19th century, which gave Prussian infantrymen a considerable firepower advantage over their European adversaries

The laser- and satellite-guided missiles that enabled coalition forces to surgically destroy Saddam Hussein’s military installations in both the first and second Gulf Wars

Yet a careful reading of military history, like that offered by MacGregor Knox and Williamson Murray in The Dynamics of Military Revolution, suggests that most technology advantages have been short-lived. In battle, one side captures the other’s weapons or, better yet, those who manufactured the armaments. Bribes get paid and craftsmen defect. Foreign spies lay their hands on blueprints, or weapons get sold to allies who later become adversaries. Tactical and strategic advantages—the product of inspired wartime leadership—are only slightly less fleeting. Successful battlefield maneuvers and new force formations are usually quickly copied and neutralized. While superior technology, tactical genius, or any of a dozen other factors may explain the outcome of a single battle, they can’t account for repeated military success—the ability to emerge triumphant from the chaos of war again and again.

What, then, accounts for long-term military advantage—if not advanced armaments and brilliant commanders? Knox and Murray contend that long-lasting leadership is most often the product of fundamental advances in military doctrine and organization. History’s most consistently victorious armies and navies have been those that were able to break with the past and imagine new ways of motivating, staffing, training, and deploying warriors. They have been management innovators. Three short examples will help to underscore this crucial point.

The British army’s success in India, from the mid-18th century to its withdrawal from the subcontinent two hundred years later, owed little to superior firepower. Indian armaments were at least the equal of English weaponry. Indeed, the Duke of Wellington, while serving in India in 1800, was so impressed by the quality of locally made cannons that he incorporated them into his artillery train. Instead, England’s conquest of Southeast Asia relied largely upon the relative advantages of the regimental structure—an organizational innovation.

According to Professor John Lynn:
The regiment provided the foundation for a permanent British/sepoy military establishment in India that defeated the great native state of Mysore, the Maratha warrior confederacy, and ultimately even the tenacious Sikhs. The regiment turned into a highly effective repository for indigenous cultural values that tapped native codes of personal and community honor in ways that temporary or irregular military units could not.

With the king or queen thousands of miles away, the regiment was a near-at-hand focal point for a soldier’s filial loyalty. Moreover, as a semipermanent organization, the regiment was an ideal mechanism for transferring hard-won knowledge from one campaign to another—knowledge that in earlier times had often been lost when military units were disbanded upon the cessation of hostilities.

Napoleon, whose campaigns are still analyzed in war academies around the world, owed much of his success to an innovation in military doctrine. Prior to the French revolution, France’s armies had fought for the monarch—a distant and often uninspiring figure. But in post-revolutionary France, Napoleon succeeded in fanning the red-hot embers of nationalism into a firestorm of military zeal. Citizens, it seemed, could be roused to fight for la gloire de la France with a degree of ferocity that no feudal system could hope to match. The result: a fighting force that Carl von Clausewitz termed a "juggernaut of war, based on the strength of an entire people."

Having been trounced by Napoleon’s forces in 1806, the Prussian army embraced a series of organizational innovations that would ultimately be imitated by every large-scale military force in the world. In a wrenching departure from centuries of tradition, the army adopted a rigorously meritocratic approach to the commissioning of officers—no longer would they be promoted on the basis of their aristocratic pedigrees. Another key innovation was the development of the general staff system. Gerhard von Scharnhorst, the Prussian army’s great reformer, believed it was dangerous for an army to rely overmuch on the brilliance of one or two generals. What was needed instead was a cadre of technically trained and exceptionally talented junior officers who could provide independent advice to their commanders. Thus was born the concept of line and staff, an organizational principle that has been implemented in virtually every modern company.

Whether one studies industrial history or military history, the lesson is the same: management innovation matters, a lot. But how, exactly, does management innovation create competitive advantage? And what sorts of management innovation are likely to be the most defensible?


Source: The Power of Management Innovation

Over the past few years, I, along with two of my colleagues at the London Business School, have been examining the history of management innovation. To date, we have studied more than 100 management breakthroughs, stretching across two centuries. One inescapable conclusion: major advances in management practice often lead to significant shifts in competitive position, and often confer long-lasting advantages on pioneering firms.

Consider, for example, a few of the 20th century’s most consistently successful companies: General Electric, DuPont, Procter & Gamble, Toyota, and Visa. What is it that propelled these companies to positions of global leadership? Of course, the usual suspects—great products, disciplined execution, and farsighted leaders—played a role. But if you dig deeper, you discover that it was management innovation, first and foremost, that set them on the course to greatness:

Managing science. In the early 1900s, General Electric perfected Thomas Edison’s most notable invention, the industrial research laboratory. GE’s success in bringing management discipline to the chaotic process of scientific discovery allowed Edison to claim that his labs were capable of producing a minor invention every 10 days and a major breakthrough every six months. This was no idle boast. Over the first half of the 20th century, GE won more patents than any other company in America.

Allocating capital. DuPont played a pioneering role in the development of capital-budgeting techniques when it initiated the use of return on investment calculations in 1903. A few years later, the company also developed a standardized way of comparing the performance of its numerous product departments. These advances addressed a pressing problem: How to allocate capital rationally when confronted with a bewildering array of potentially attractive projects? DuPont’s new decision tools would help it to become one of America’s industrial giants.

Managing intangible assets. Procter & Gamble’s pre-eminence in the packaged goods industry has its roots in the early 1930s, when the company began to formalize its approach to brand management. At the time, the idea of creating value out of intangible assets was a novel idea. In the decades since, P&G has steadily built upon its early lead in building and managing great brands. In 2007, P&G’s business portfolio included 16 brands that were delivering more than $1 billion in annual sales.

Capturing the wisdom of every employee. Toyota is the world’s most profitable carmaker—by a long margin. Much of its success rests on an unmatched ability to enroll employees in the relentless pursuit of efficiency and quality. For more than 40 years, Toyota’s capacity for continuous improvement has been powered by a belief in the ability of "ordinary" employees to solve complex problems. Indeed, people inside Toyota sometimes refer to the Toyota Production System as the "Thinking People System." In 2005, the company received more than 540,000 improvement ideas from its Japanese employees.

Building a global consortium. Visa, the world’s first "virtual" company, owes its success to organizational innovation. When Visa’s founding banks formed a consortium in the United States in the early 1970s, they laid the groundwork for what would become one of the world’s most ubiquitous brands. The key management challenge: building an organization that would allow banks to compete for customers while collaborating around infrastructure, standards, and brand-building. Today, Visa is a gossamer web that links more than 21,000 financial institutions and 1.3 billion cardholders. The Visa network processes more than $2 trillion of purchases every year—about 60 percent of all credit card transactions.

These cases (as well as more recent ones, which we will explore in subsequent chapters) highlight the decisive role that management innovation often plays in helping companies build durable advantages. Indeed, no other factor seems to have been similarly instrumental in underwriting long-term competitive success.

This assertion, bold as it may seem, is buttressed by the findings of military theorists who’ve explored the origins of sustained superiority in war making. Here, too, management innovation seems to be key. In battle, as in business, most victories are pyrrhic and temporary. Yet here and there, in the bloody pages of history, one observes a military regime that has consistently bested its enemies, often despite a deficit of men and matériel. As you might imagine, these cases are of great interest to military scholars who, like business school professors, have an interest in uncovering the deep roots of competitive advantage. Why is it, these analysts ask, that some armies and navies have enjoyed prolonged periods of military supremacy?

When confronted with this question, a layperson is likely to credit superior weaponry. Prime exhibits might include:

The deadly and much-feared yew-wood longbow, which, in the 14th century, allowed the archers of King Edward III to deal out a series of crushing blows to England’s enemies

The agile and speedy three-masted caravel, a product of 15th century Iberian ingenuity, which gave European powers a sizable advantage in building their globe-spanning empires.

The breech-loading needle gun, perfected in the mid-19th century, which gave Prussian infantrymen a considerable firepower advantage over their European adversaries

The laser- and satellite-guided missiles that enabled coalition forces to surgically destroy Saddam Hussein’s military installations in both the first and second Gulf Wars

Yet a careful reading of military history, like that offered by MacGregor Knox and Williamson Murray in The Dynamics of Military Revolution, suggests that most technology advantages have been short-lived. In battle, one side captures the other’s weapons or, better yet, those who manufactured the armaments. Bribes get paid and craftsmen defect. Foreign spies lay their hands on blueprints, or weapons get sold to allies who later become adversaries. Tactical and strategic advantages—the product of inspired wartime leadership—are only slightly less fleeting. Successful battlefield maneuvers and new force formations are usually quickly copied and neutralized. While superior technology, tactical genius, or any of a dozen other factors may explain the outcome of a single battle, they can’t account for repeated military success—the ability to emerge triumphant from the chaos of war again and again.

What, then, accounts for long-term military advantage—if not advanced armaments and brilliant commanders? Knox and Murray contend that long-lasting leadership is most often the product of fundamental advances in military doctrine and organization. History’s most consistently victorious armies and navies have been those that were able to break with the past and imagine new ways of motivating, staffing, training, and deploying warriors. They have been management innovators. Three short examples will help to underscore this crucial point.

The British army’s success in India, from the mid-18th century to its withdrawal from the subcontinent two hundred years later, owed little to superior firepower. Indian armaments were at least the equal of English weaponry. Indeed, the Duke of Wellington, while serving in India in 1800, was so impressed by the quality of locally made cannons that he incorporated them into his artillery train. Instead, England’s conquest of Southeast Asia relied largely upon the relative advantages of the regimental structure—an organizational innovation.

According to Professor John Lynn:
The regiment provided the foundation for a permanent British/sepoy military establishment in India that defeated the great native state of Mysore, the Maratha warrior confederacy, and ultimately even the tenacious Sikhs. The regiment turned into a highly effective repository for indigenous cultural values that tapped native codes of personal and community honor in ways that temporary or irregular military units could not.

With the king or queen thousands of miles away, the regiment was a near-at-hand focal point for a soldier’s filial loyalty. Moreover, as a semipermanent organization, the regiment was an ideal mechanism for transferring hard-won knowledge from one campaign to another—knowledge that in earlier times had often been lost when military units were disbanded upon the cessation of hostilities.

Napoleon, whose campaigns are still analyzed in war academies around the world, owed much of his success to an innovation in military doctrine. Prior to the French revolution, France’s armies had fought for the monarch—a distant and often uninspiring figure. But in post-revolutionary France, Napoleon succeeded in fanning the red-hot embers of nationalism into a firestorm of military zeal. Citizens, it seemed, could be roused to fight for la gloire de la France with a degree of ferocity that no feudal system could hope to match. The result: a fighting force that Carl von Clausewitz termed a "juggernaut of war, based on the strength of an entire people."

Having been trounced by Napoleon’s forces in 1806, the Prussian army embraced a series of organizational innovations that would ultimately be imitated by every large-scale military force in the world. In a wrenching departure from centuries of tradition, the army adopted a rigorously meritocratic approach to the commissioning of officers—no longer would they be promoted on the basis of their aristocratic pedigrees. Another key innovation was the development of the general staff system. Gerhard von Scharnhorst, the Prussian army’s great reformer, believed it was dangerous for an army to rely overmuch on the brilliance of one or two generals. What was needed instead was a cadre of technically trained and exceptionally talented junior officers who could provide independent advice to their commanders. Thus was born the concept of line and staff, an organizational principle that has been implemented in virtually every modern company.

Whether one studies industrial history or military history, the lesson is the same: management innovation matters, a lot. But how, exactly, does management innovation create competitive advantage? And what sorts of management innovation are likely to be the most defensible?


Source: The Future of Management, by Gary Hamel (Harvard Business School Press, October 2007). Reprinted by permission of Harvard Business School Press. Copyright (c) 2007 Gary Hamel. All rights reserved.

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