What (Else) Happened?

by Andrew McAfee on October 14, 2008

I spent last Friday talking about management with a bunch of ‘thought leaders’ — academics, writers, venture capitalists, executives, etc.. As I described in my last post, we were brought together by Gary Hamel and the Management Lab to brainstorm the experiments we’d like to run on any corporate guinea pigs that volunteer themselves.

I noticed a broad consensus among attendees that things are different now —  that the challenges and the opportunities facing large organizations and their leaders are not the same as they ever were. And they’re different in both degree (competition has always been nasty, but it’s getting nastier) and in kind (open source communities?  Huh?). We came from a broad range of disciplines and job titles, but none us said any form of "Hold on a minute, everyone. Things really aren’t all that different now for executives and companies. Let’s not oversell the current era."

So I just want to sanity check this belief, and then ask a follow-on question. First, the sanity check. Have corporations and other large organizations really entered a new period, one in which new things are happening and all things are happening faster? What evidence do we have that this is the case? I presented some evidence to this effect in the Harvard Business Review article I wrote with Erik Brynjolfsson this summer and in these blog posts. There’s also other evidence of ‘hypercompetition‘ (an upcoming special issue of the Strategic Management Journal will be devoted to this concept).

But are they any skeptics out there? If so, I’d love to hear from them, or about them. Are there reasonable and thoughtful people who believe that things aren’t all that different now than they were 40, or even 20 years ago? We have a constant tendency to overstate the importance of our own circumstances —  our time, our surroundings, etc. —  so it’s important to guard against that tendency, and to be sure that when it comes to organizations and competition it’s not the same as it ever was.

The follow-on question is a simple one: if things really are different now, why are they? It seems very unlikely to me that the leaders of organizations as a group suddenly said "You know all the books the management scholars have been writing for several decades now? Let’s all start putting that stuff into practice now." In other words, I don’t think that we reached any tipping point where the weight of writing and thinking about management actually started to influence management much more than it had done previously. In short, this isn’t about us.

So what is it about?  I can think of three things that have substantially changed in the world of business over the past 25 years (to pick a pretty arbitrary time period). The first is the market for corporate control —  the emergence of LBOs, private equity, and all the other alternatives to big public corporations in which executives are paid like bureaucrats. The second is the appearance of several huge new players into the game of modern capitalism. At the risk of saying something inexcusably obvious, China, India, Russia, Brazil, and others are a big deal.

The third, of course, is information technology. In 1983, US companies spent $32 billion on IT, which accounted for 9.8% of their total investment in fixed assets that year. By 2006, spending had risen almost tenfold, to $294 billion, and IT accounted for 21.1% of new fixed assets purchased that year in the US. To put it mildly, this is a big change in what companies are composed of, and it has to be having an impact (or several of them).

I believe that IT is the biggest of these stories, but I don’t want to argue that point here. Instead, I want to ask if this list of three big things that have changed the game of business is incomplete. Has anything else changed over the past quarter century that could plausibly account for or contribute to the widely-shared feeling that we’re in a new era now? If so, what is it, and why do you think it’s such a big deal?  What evidence do you have to support your belief? Leave a comment, please, and let us know. We’d love to hear what you think, and why.

  • http://alignmentinquiries.blogspot.com/ Andrew Meyer

    I agree with your three, though I would have called them skill specialization, globalization and IT. There is a fourth element which has changed, the background of Sr Execs running companies.

    25 years ago Sr Management was predominantly made up of people who grew up in the depression, lived through WWII and took a command-n-control view of business. When those Sr Execs had started many of the businesses themselves or they had gone into them in the 50s when college degrees were still relatively rare, masters degrees extremely rare. There were centralized, core groups of people who understood all the elements of the business, how it was put together and what things really meant.

    In Lee Iacocca’s “Iacocca”, he talked about how there were only 17 people who really understood what was happening at Ford. I think Ford had over 250K employees at the time.

    Over the last 25 years, baby boomers (please note, I am not a baby boomer) took over the Sr Exec positions. They were accustomed to working with educated professionals. Their outlook was vastly different. They flattened organizations, reengineered and drove responsibility to lower levels. They were experimental, open to trying new things and the world of business went through tumultuous change. They didn’t expect to stay in one company their whole life and were open to outsourcing as opposed to centralized control.

    Andy
    http://alignmentinquiries.blogspot.com/

  • Birgit

    Reading your blog post on a late evening,
    I wonder about what else has happened… cf. your triggering question… and I thus want to add a preliminary thought only (but since it is beyond my own field others may find evidence or reject this). My immediate thoughts are that there seems to be several societal changes that together affect the feeling of a new era; access to and engagement in digital ICT is one basic factor but there are others as well; e.g. a larger share of the world population is living in really big cities and also interacting extensively through multiple media. This living-in-really big cities and extensively interacting via cell-phone and email with others throughout the day in and between generations and both sexes seem to be new phenomena and it may, I guess, influence the extent of financial and other transactions, perhaps potential “rotten” loans, too. I do not have the numbers here so you need to check the facts please.
    Extensive city-growth creates both opportunities and fragile aspects. Migration to cities does not seem to stop either, cf. China. I’ve also heard a range of new big cities are being planned in China, the Emirates, and elsewhere. The many potential or actual aspects of this emergent phenomenon of vast numbers of interacting city-people for business I guess contribute to a new era feeling.

  • http://libraryclips.blogsome.com John Tropea

    I think things are faster now because of more competition. There are more players now as there are less barriers (less middlemen, meaning less cost) due to the read/write web. I guess this is related to the long tail.

    We can also collaborate faster, the blogosphere and new tech enables us to be aware of more things, and have conversations, therefore advance at a quicker pace (just like the SARS virus collaboration)

    So if we become smarter (more capable, learning) at a faster pace due to internal blogospheres and networks, this means we can implement new things and new ways faster…so I agree things are more fast paced, as we now have a power shift to the bottom-up/edges, where there are more people.

    The world has become more flat (T Friedman)

  • http://www.buzzgain.com Mukund Mohan

    It may be mentioned in your IT point, but Communications (Mobile, Internet) is the BIGGEST change versus the last 25 years. The democracy that it has brought about within large companies and small is astounding. It literally levels the playing field (only somewhat I think) and has the potential for more.

    Human communication would largely be top down, delayed and somewhat controlled. The examples are innumerable (farmers looking up milk prices in South India before selling to get a better price, remote tutoring, etc.). Now, I cant quite call it bottom up as much as ethereal. Its everywhere.

    Access to information (thanks to the net) and the rapid communication of it (via the net or phone) has dramatically changed lives.

  • http://AlexBain.com Alex Bain

    I agree with the 3rd category being IT, but I don’t know if the increase in spending is the most significant change in IT.

    I think it’s perfectly possible that the % of spending on IT could have been held constant, but the nature of the underlying IT is so fundamentally different nowadays.

    I “blame” the democratization of information, more than the increase in allocation of funds toward it is changing the nature of business. Freely/cheaply available tools (e.g. Google Apps, Amazon web services) lower the barriers to entry for small businesses. They also tend to make information more symmetric, so many competitive advantages might be shorter lived. A good idea can be copied quickly.

    Additionally, email/blogs have given everyone a printing press, so broadcasting a message in today’s environment is fundamentally different. Advertising is in a state of flux, and the press are losing their monopoly on opinions.

    As Clay Shirky puts it: “more [or faster] is different”. The fact that more ideas can be implemented in a shorter period of time today than ever before is the biggest difference that I see, and it strikes me as so much more significant than global competition or financial innovation.

  • Tom Stewart

    Andy,

    I’m not skeptical about the existence of hypercompetition, but I would caution against getting all, er, hyper about it, because there is always a lot of, er, hype in such situations. It behooves us to boast/bemoan about the pickle we’re in. To say that never before has numankind, or homo economicus, faced a world like this one adds kerosene to the burning platform, glamor to the often mundane work of wearing agray suit and running a business, urgency to the consultant’s pitch, sales to the professor’s book. That said, there’s evidence that, for example, the rate of industry change might be faster than it was; if you think in Porterian terms, Mike’s work looks at the forces that shape competition within the context of an industry that itself changes at a significantly slower rate than do the companies within the industry. In “classic” Porter, industry change is held as a constant–you don’t feel it any more than we feel the movement of techtonic plates. But if industry rates of change have increased, that would be a whole new dimension; it could cause radical, often sudden, reshapings of the field on which the forces of competition play. It would be interesting to look for evidence of this hypothesis.
    And regardless of whether this or another hypothesis checks out, it would certainly be smart not just to clock the rate of competition but to analyze it. And to discount by, say, 15%, all claims that never before has anyone ever faced anything remotely resembling the amazingly complex hyper intense look-how-macho-I-am world we live in.
    Tom

  • http://www.facebook.com/profile.php?id=502749470 David Goldstick

    Have corporations and other large organizations really entered a new period, one in which new things are happening and all things are happening faster?
    – It’s not just corporations and large organizations that have entered a new period; but society. Every day the world becomes smaller and more open as technology increases. Social technology decentralizes The flow of data,information, knowledge and wisdom which provides greater collective insight and speeds change further. If properly harnessed, the rate of technological change and thus further societal change will increase.

    Are there reasonable and thoughtful people who believe that things aren’t all that different now than they were 40, or even 20 years ago?
    – The more things change, the more they stay the same. The bedrocks of the human condition and economics haven’t changed. Technology is furthering societal change which furthers technology which furthers societal change…

  • Kelcy Allwein

    I think that your answers are appropriate but superficial. I think the issue lies with the speed at which culture is changing. Of course this is enabled by technology and the entrance of new players who are very differently culturally than we are. William Wallace wrote a book several years ago called the Techo-Cultural Evolution that provides a good overview of the pace of cultural change due to technology insertion starting as early as the introduction of agriculture and farming. The basic premise is that we invent the technology and the technology reinvents our culture.

    20 years ago, the internet did not exist except as a research net. In 1988, a consumer was limited to local networks for information and visits to bricks & mortar facilities. They might be able to write away for additional info but that was limited to speed of the US Post Office. In those days businesses could do traditional market research and easily predict the consumer market. Imports were controlled based on the predictability of the consumer market. With the ever-increasing rate of new technology in all areas of our lives and particularly those technologies that connect us, corporations must understand a quickly evolving marketplace that can rapidly crowdsource information, while evolving to engage that same marketplace. At the same time the need for globalization have forced companies into new roles formerly reserved for a limited group like oil companies. This included areas like diplomacy with governments and national security (balancing different nations in both cases) as well as the more traditional roles. It takes a great deal of agility and flexibility to keep up with the changing roles, changing cultures and changing partners.

  • Brian Gillooly

    I know you’re looking for what *else*, but first wanted to comment on one of your three: I agree IT is probably the biggest new factor, but specifically how IT is enabling the customer to influence the manufacture, pricing, inventory, delivery, and support of products and services (we’ve called it Customer Centricity 2.0). I could go on for a while about details, but essentially, IT and in particular Enterprise 2.0 technologies have enabled customers to gain greater access to — and interact with — company information, not to mention supply their own feedback. That has sped up product cycles and revved competition (particularly because customers are now more fickle and are only a mouse click away). There’s so much more to this, but just wanted to mention that.
    The factor I’d add, which is related to your second point, is globalization, which of course is fueled by IT as well. Not the emergence of new geographies into the world of capitalism, which you already mentioned as your second factor, but the globalization of companies. The competition for tapping into new markets, the competition for resources, and the competition for labor have all contributed to an intensity in business that we hadn’t seen previously.

  • http://atulrai1.blogspot.com Atul Rai

    The basics of human society, and hence, business, dont change. what is changing is that the things are happening at a much faster speed today than they every have in the past. This continues to remind me of the title of the book by Bill Gate … Business @ the speed of thought.

    This, of course, in addition to the “short circuiting” that social computing is doing … the “voice” is there with more and more people. Hence, more and more people are in a position to be heard.

  • Henry Singer

    Andrew,
    I believe that information technology; in particular Enterprise Systems (such as SAP) has been an enabler of the broad adoption of Enterprise Resource Planning (ERP) as a set of principles, processes and practices. As a result, Enterprises of all sizes can rapidly adjust their supply plans to respond to changes in the marketplace (demand).
    In my 25 year career as a supply chain management professional I have seen “planning” go from a paper based process that took weeks, if not months to replan from top to bottom, to one where supply can be replanned across the supply chain virtually synchronously with demand.
    As a result, the economy has seen significant improvements in customer service levels and acceleration in inventory velocity.
    From the perspective of both inside and outside the enterprise, this would be experienced as acceleration in the rate of change and an increase in the level of competition.

  • Mat Fogarty

    Surely, if the corporate environment is becoming more and more competitive, then corporate profits (as a percent of gdp) would decline.

    The evidence does not support this. Corporate profits in 2006 were the highest since the 1960s. http://www.nytimes.com/imagepages/2006/08/28/business/28wages_chart.html

  • http://tomrose.blogspot.com Tom Rose

    The source of our difference comes from “easy” money is not so easy anymore, leading to careful understanding of spending and a hypersensitive environment for improving the top line revenue streams. I think many executive teams in large organizations have operated in a no-real-thought-required environment for so long, and now they actually have to execute, as opposed to only giving the appearance of execution. So from their perspective, yes things are extremely more difficult, when in fact real change is of a much smaller magnitude.

    Global competition from much smaller companies, the availability of technologies that level the playing field for all companies, as well as global flow of ideas and money puts competitive pressure on organizations from all sides. No longer can a large organization have competitive advantage simply because of its size. Large companies have coasted for such a long time, and now there is competition again, most don’t know what to do, and now it shows.

    So is there any difference in how a company looked 20 – 40 years ago, well sure, and things will be different 20-40 years from now. Things are always changing, new tools/processes are always available, as well as new competition. However, fundamentally nothing has changed in how to run a company. I expect Senior Leadership Teams to adopt a posture of change in their companies, they should be continuously evolving. This concept is nothing new, and for an executive leadership team to say their environments have drastically changed, and now “everything” is different so their jobs are significantly more difficult means something…they are not in a posture to evolve, which is a fundamental tenant of managing an organization that has never changed.

    Best Regards,

    Tom

  • http://johnmcdonald.info John McDonald

    I agree with a large part of what Tom Rose above me has said. It seems like the current era is displaying symptoms related to the expansions of credit and debt over the prior 25 year period. There is currently a lot of chaos in the macro-economic picture and that is sort of a clear signal that a new era is coming upon us, but not quite so clear about what this new period will look and behave like.

    It is even likely that this chaos and volatility will become the new “norm” for a while to come and the key to success will be finding niche markets and ways to balance risk exposures related to credit, currency, and commodity markets.

  • http://vzach.de/blog/ Valentin

    hm, you seem to be missing the obvious: ‘mobility’ and a decrease in marginal cost of production for many goods and services.

    Mobility: There seems to be a steady increase in Mobility of capital, goods (in particular digital goods) and people (due to changes in law, society and technology). This directly leads to more complex decisions and more competition. More competition because there are simply more players competing for the same market, the same people and the same capital, e.g. if shipping a bottle of vine from Australia to France costs five times its production, there is (almost) no competition between me and Australian Vine producers.
    More complex decisions, because increased mobility means more opportunities. These days the best thing to do with Shrimp caught in the Baltic Sea may be to process them in Spain, package them in Poland and then sell them in Switzerland. This is just quite a complex process to develop and manage, a process I would not even need to think about if transport costs where higher.

    Marginal Cost of Production: For almost all digital goods the marginal cost of production is near zero. The same is becoming true for many other areas as well, e.g. once I have the factory and the design, making another CPU is very cheap; in a modern (self-service) bank, serving one more customer is almost free … the continuing trends of “self service economy” and “mass customization” (and “desktop manufacturing” and “cloud computing” in the future) make this true for more and more areas. I would speculate that this means that more and more markets become “winner takes it all markets” making it very hard for smaller players to survive. Also, this means faster competition because you cannot rely on the fact that your competitor will take years to scale his business to serve all your costumers.

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