Expense Sheets and Cultures of Trust

Business travelers know the taxi expense fiddle. You ask the taxi driver for a receipt. He winks at you and gives you a blank form, implying you can fill it in later, and who’s to say how much that ride cost, wink-wink, nudge-nudge.

How honest are you about the number you write down? How honest do you think others are? Do you think it varies by occupation? By income level? By geography? Would a college professor from Ohio State be less, or more, honest than an associate at a New York private equity firm?

Does the typical response look different in Beijing than in New York? What about Paris? Or Buenos Aires?

What are the cultures of trust? And what drives them?

Chinese Receipts and American Rentals

In China, street vendors hawk fake receipts for sale, as if they were DVDs or watches or fast food.   An American instinctively thinks, “How corrupt!” And yes, it is.

The news is also rife with stories of massive graft in Chinese government, with mid-level officials buying Mercedes and expensive wines. We also hear horror stories emanating from China about food safety.

Clearly China has a problem with trust in government and business. We in the West can comfortably turn up our noses and tell ourselves that at least our trust issues are far more evolved.

Or are they? Consider the NY private equity partner and lawyer who engaged a broker to find a scarce rental in the Hamptons.  When the broker found them one, they brazenly approached the owner to cut out the middleman broker.

Consider the Big Company which, when charged with violating their self-advertised objectivity, independence and integrity came up with the novel defense that hey, nobody believes that crap anyway, so don’t hold us to it.

Leaving aside whether those kinds of violations are more “evolved,” they surely are different in kind. What are those differences?  What are the kinds?

Cultures of Trust

We often talk about trust in business as if it were a single, universal trait. It is not. Francis Fukuyama, in his seminal book Trust, wrote well about this. In China, the level of trust is very high within extended family relationships – but quite low outside it. The reasons are linked to China’s historical development.

By contrast, French society has a great deal of confidence in centralized, bureaucratic institutions, e.g. the Ecole Polytechnique, or wine labeling.  Trust in Japan is high within the island-bound nation/culture of Japan itself, but much lower when it comes to gaijin. In southern Italy and Eastern Europe, trust is often more tribal.  And so forth.

What is the culture of trust in the US, particularly in business? Given the nation’s short and melting-pot  based history, it’s not driven by a common culture or religion. Instead, there are two ideologies that play a particular role in determining the nature of trust in the US: freedom and capitalism.

The “brand” of the US has always pitched freedom as front and center, and not just religious freedom. For countless millions, it has meant freedom to make it economically, through the fruits of your own labor, if not for you then for your kids.

Closely linked to that is our view of capitalism. While of course there are nuances, the main view of business throughout our history has been a belief that the pursuit of individual good ends up benefiting society as a whole. Adam Smith’s Invisible Hand has been a welcome metaphor for US business over the years.

There are a whole lot of things to admire about that ideology; the US can point to its own economy as Exhibit A. But it does mean we look at trust in a  slightly different way than do Chinese, or Russians, or Chileans.

In particular, we look at it like rules in a game.

The rules of the game are clear, but they can change. We generally don’t like rules, but admit that some are necessary. We have referees to help interpret and enforce those rules. Occasionally, the refs get over-matched, and social change results (though usually not before some disaster makes it politically unavoidable).

The main rule is, stay within the rules. All else is fair game, until and unless the rules change.

That kind of ideology makes trust a little more conditional in the US than elsewhere. And there is good and bad in that as well. The good part is that Americans can move with the times, adjust, be flexible about issues of trust when the need arises. The rules of trust may change, but the game itself keeps its integrity.

The American trust problem arises, I think, when we stop treating business as a game. And we have. Etiquette is out. Simple agreements are so last-century – now they need hedging with counter-parties. And handshake deals? Last millennium.

The rules become exogenous to the game, seen as a hindrance, and only one rule survives– survival of the fittest. That’s where we’ve gotten to, and the results are ugly. The doctrine of competitive strategy says, at its heart, that relationships are a cruel myth – the only thing that matters is sustainable competitive advantage, over your customers, your employees, and everyone else.

We’ve marinated in that solitary stew long enough. In an increasingly inter-dependent world, the view of every-man-for-himself is a recipe for a circular firing squad.

A New Business Ideology?

Are things changing? Does Capitalism 2.0 require Adam Smith 2.0, or something even more radical? I’ll talk about that in an upcoming post.

Sales, Surgeons and Profits

iStock_000002256780XSmallThe NYTimes recently published Salesmen in the Surgical Suite, a look at some questionable sales practices in the US surrounding a robotic surgical technology called the da Vinci Surgical System, a product of Intuitive Surgical Inc. The article cites a case of severe damage to a patient due to inadequate training of surgeons, and a variety of documented practices by Intuitive pushing the limits of proper training and supervision.

My point is not to argue the case for or against the company; that’s being done already in a case filed against them. What I do want to touch on is how we should think about issues like this. In other words – just what kind of a problem do we have here?

Profit vs. Patients?

The ultimate issue, I suggest, is the relationship between a for-profit business and the well-being of the end-user customers. Health care is an extreme case, because of the direct link between the two; but in a sense, this is the same issue we face in a capitalist society for any good or service. Healthcare, and surgery in particular, are extreme cases, thus useful for clarifying issues.

There are three commonly heard points of view:

1. There is an innate conflict between the interests of the profit-seeking business sector and the ultimate good of the patients; this conflict must be regulated by a third party of some sort.

2. There is no innate conflict between business and patients, except insofar as business is regulated by governmental and other third parties, who inevitably just distort the ideal workings of pure markets.

3. There is no innate conflict between business and patients, except insofar as business misreads its own long-term self interest by being addicted to short-term fixes, leading to regulation – a self-inflicted shooting in the foot.

The first two arguments are endlessly hashed over, with much heat and little light, in all the various venues of the day: from Congress to HuffPost to talk radio to coffee shops. (I suspect this debate is largely a US debate, as most other developed economies have tilted toward the first viewpoint, far away from the second). I’m not going to change anyone’s mind about the relative merits of one and two.

But number three is interesting: it suggests that the business-society conflict is unnecessary, and that the solution lies largely within the hands of business itself. All that right vs. left, redneck vs. socialist shouting is nothing more than noise.

Is this a utopian, pollyana-ish view? Or is it very real?

The Best Interests of Business

We can reframe the issue as simply, “Is there or is there not a long-term fit between the interests of business and consumers?” Karl Marx answered in the negative, and claimed that the tension would ultimately result in revolution. I suggest that any right-thinking capitalist must answer in the affirmative – there must be a commonality of interest, else the doctrine of capitalism is of little use or interest.

But if that’s the case in the long run – why then isn’t it in the short run? Why do we see salespeople play with endangering people’s lives in order to get the order in before the end of the quarter? Why do companies fight for less regulation, commit economically foolish acts in order to smooth quarterly earnings, and prefer the net present monetized value of almost anything, rather than the longer-term asset that comes from brand, history and culture?

We live in a very imperfect business world, I suggest. We do not do a good job of assessing economic good, or even of assessing business value. We rely on definitions of value which are narrow, solely financial in nature, and short-term. The tyranny of the discount rate leads us to forego thinking about the next generation – it’s just un-economic to worry about something 40 years out, there’s not enough present value in it to justify it.  The Chinese have a history of looking at hundred-year timeframes; the US struggles to get past quarterly, and three years might as well be a lifetime.

The poverty of our financial calculus can be described several ways. Economists would say we do not take into account externalities, so we delude ourselves about the costs of degrading the environment. Social scientists describe it as resulting in a poverty of the spirit (a tone we hear echoed by those who preach ‘the final days of the empire’).

This poverty of calculus is supported by impoverished thinking. Adam Smith was brilliant; the caricatures of him that came down through Ayn Rand and the Chamber of Commerce retain nothing of his focus on the good of society, much less his work on the moral sentiments. Even business theory is impoverished – NPS and Five Forces just don’t have the sweep that we saw from Peter Drucker or even Sun Tsu.

What I’m suggesting is that business needs to radically re-think itself, across the board, into a long-term partnership with the rest of society. The commercial instinct of mankind ought to be a driver of value and wealth creation for all of society, and not hostage to an ongoing battle between haves and have-nots. Whether we need more or less government, more or less regulation, should not be the issue.  The issue should be how can business and society line up on the same team?

We really should be able to do better.

Competitive Theory and Business Legitimacy: Article

Rather than write two posts today, I’d like to point you to my article at on Michael Porter, competitive theory and business legitimacy.  Or rather, on how business can regain its legitimacy, which is at generational lows.

The issue of business legitimacy was raised in by my old (and very distinguished) professor Michael Porter, who suggested that legitimacy has to be regained not through charity but by having part of businesses core purpose be to do good.  I think this is correct, as far as it goes, but I suggest taking a long term perspective may be more successful than his way.

Click on over to and read today’s post there.  Let me know what you think, because it’s about more than just legitimacy, it’s about how and why we run our businesses.

The Changing Face of Capitalism: Schizophrenia in the Apple Store

The other day I was in one of the Apple Stores. The hinge had broken on my MacBook Air, which meant the top of the computer, the screen part, had to be replaced. It was to be done for free, which I love about Apple.

The store was crowded; I asked the young lady salesperson if using my Mac ProCare card would move things along. She looked at my card, told me it was out of date, and offered to go update it.

When she came back, she was apologetic. “The thing is,” she stammered, “I think they’re kind of going to be de-emphasizing the ProCare program.”

“Huh?” I said. “Is it continuing, or not?”

“Well, I think they’re maybe going to be phasing it out,” she squirmed.

“As of when is it phasing out?” I asked, “ and is there a replacement program? I just want to know how to get premium service.”

“Well, I think they’ve already stopped it, really,” she stammered. This was getting nowhere fast.

Fortunately, the store manager came by and took over; he assured me I’d get the repaired computer by day’s end (which I did, by the way).  I asked him, “What’s up with the ProCare program?”

“Oh,” he said, “we’re discontinuing it.”


“Well, it was so popular that everyone was buying it, and then you have a problem with, like, who do you let at the head of the line, and who do you have to say no to, and all that sort of hassle.”

This boggled my mind. “Why not just raise the price?” I asked.

He laughed. “You know, several other people have suggested that too.”

“Well no wonder they have,” I said. “If everybody wants something at one price, raise the price—you make more money, and it very easily sorts out to whom it’s worth more and to whom it isn’t.”

“Yeah, but it’s kind of unfair that way too, you know,” he said, in a ‘you clearly don’t get it, do you’ sort of a way. And I left, bemused again at the curious mix of capitalism and west-coast do-goodism that is Apple Computer.

No company is better at in-your-face planned obsolescence than Apple; just trying getting a replacement battery for an iPod. No company is better at aggressive pricing; and how many mature companies can claim a stock price growth of ten fold in five years?

All this, in spite of echoes of PC (not the computer) instincts and shades of tie-dyed Deadhead ethos in the stores. Or, is it because of said instincts and ethos?

Changing Ideologies in Business: From Competitive Capitalism to Collaborative Capitalism

Then again, why should Apple be unique in its schizophrenia about capitalism? Business in general is in the midst of a paradigm shift in business, away from shareholder-centricity toward stakeholder-centricity. An excellent article in the Economist  summarizes this ideological shift, citing several current business thinkers.

Business, I think, is undergoing some serious foment with respect to some very fundamental beliefs. Milton Friedman, Michael Porter, Michael Jensen—these are the thought leaders of the past, championing neo-classical economics, the purification of competition, and the primacy of shareholder wealth respectively.

The new thought leaders remain to be definitively enumerated, but the issues are emerging. They rhyme with collaboration, trust, networking, flat organizations, and Gen Y. To name a few.

Stay tuned, it’s getting interesting. And Steve Jobs may end up, once again, looking pretty prescient.

The Evolution of Capitalism

Dinosaurs fightingIn 1986, I attended my 10th MBA reunion. I sat in a class taught by Joseph Bower, along with the classes of various years ending in a “6” or a “1.”

Bower talked about global over-capacity in the chemical industry and what could be done about it: “co-opetition” was his solution. The 5-year people looked somewhat bored by it. I found it quite fascinating, as did others in my year.

But the old guys were apoplectic. They spluttered and muttered things like ‘what has this school come to, don’t they know it’s a business school,’ and the like. To them, it was but a short hop to socialism.

It was never that simple. At that time there were already newspaper company joint operating agreements, which amounted to co-opetition in the very newsprint these old gents held in their hands at the Club in the evening. But no matter, ideology dies hard.

Their form of ideology—competition to the death, but in a gentlemanly kind of way—went through a resurgence in the 1980s with the advent of competitive strategy. We heard some about strategic alliances, but as far as I was concerned, co-opetition didn’t get back to the front page.

New Assaults on Old Business Ideologies

But as Michael Jackson once said, that was then: this is now. Now there is some serious re-examination going on about the nature of capitalism.

Umair Haque, who’s based in London, is burning up the Harvard Business Review blog scene by writing about constructive capitalism and about the economics of good and evil

At Harvard itself, Bruce R. Scott  writes with great perspective and wisdom about the complex relationship between democracy and capitalism. Sorry, die-hard fans of Adam Smith’s invisible hand; it just ain’t that simple.

And speaking of the Invisible Hand, Adam Smith first used that metaphor in his earlier book, the Theory of Moral Sentiments. He used it to describe the natural working of human sympathies for each other. Over a decade later he resurrected the metaphor to do double duty in Wealth of Nations, where he used it to describe the workings of a competitive market.

At the Boston Consulting Group, Philip Evans and team have done great research into just how it is that Toyota is so much more cost-effective than Detroit at building cars. It’s not pension and health care costs—it’s more effective process innovation, which in turn comes from—omigosh, collaboration. I imagine the old-timers from my reunion popping a blood vessel over that one.

I’m currently reading Winner Take All: How Competitiveness Shapes the Fate of Nations,  by Richard Elkus. Elkus was present at the creation—and destruction—of the US consumer electronics industry, working for Ampex.

Ampex coulda been Sony, or Toshiba. The reason it wasn’t is excruciatingly obvious as Elkus tells the tale of US management doing its best: valuing the transaction over the relationship, focusing on competition not collaboration, channel-loading and fudging costs, and converting all business issues into present value financial calculations.

Up against an Akio Morita, who actually believed in alliances and collaboration, who understood interconnection in technologies, and who worked for the long term, Ampex didn’t stand a chance. Nor Zenith. Nor, I would add, Detroit. The colossal disadvantage of our national economy at this point, he argues, is that we have sold all our technology for licensing fees, outsourced all our manufacturing for low input costs for quarterly earnings, and made ourselves little else but master marketers and consumers.  We exited what BCG called ‘dog’ businesses, and ended up dog food.

The Coming of Collaborative Capitalism

I’ve played around with various terms for it, but I’m liking “collaborative capitalism.” It’s light-years beyond 1986’s co-opetition, because it’s not just capacity-sharing.  It’s true collaboration and trust, working beyond corporate walls and across companies.  Many of us are seeing this trend at the same time.

Way back in 2002—a couple recessions or so ago—I wrote a little article called The Death of Corporations.  It basically said companies who competed against each other were, to use Robert Frost’s metaphor, disappearing not with a bang, but a whimper, as commerce gradually begins to operate across and through companies, rather than in the form of mega-goliath companies clumsily "competing" against each other, spouting their platitudes.

I still think that article’s going to be an overnight sensation, it just needs a little more time…


Can You Differentiate Yourself from a Competitor in a Sales Presentation?

It’s tempting. Can you just come out and say you’re the best, without look self-serving? Can you point out a weakness in your competitor without it looking like bragging or mud-slinging? And if the client really needs to know something less-than-perfect about the competitor: can you point it out?

I rarely cite politicians in this blog, but one piece of received political wisdom works in business too: if you’re in the lead, don’t debate the challenger.

Politics offers another lesson too: mud-slinging poisons the well. Negative campaigning works–in the short run. In the not-very long run, it doesn’t work for anybody, including the slinger and the public. No wonder politicians rank so low in trust.

Competitive Disadvantage

Business has focused in recent decades heavily on competition. Try completing this sentence: “The purpose of a company is to…” Way too many people are channeling Ayn Rand these days, by saying “…make money.”

Peter Drucker, esteemed business guru, finished it this way: “…create and serve customers.” Drucker is still respected, but more quoted than acted upon.

In selling, there has always been this tension between a focus on competition and on customers. Is winning a byproduct of customer focus? Or is winning the goal, and customer focus simply a means to the greater end of winning?

Consider romantic relationships: is the best strategy for seeking a partner to disparage his/her other suitors? Or to focus on your intended? I vote for number 2.

True Client Focus

You may be thinking, “Don’t I have an obligation to politely show my client how we’re right and they’re wrong?”

Well, what does the client hear when you disparage a competitor? Of course, they may hear what you intend—that on some important dimension, you are better. But there is collateral damage.

They will also hear “These folks are focused on winning, not on helping me. How do I know I can trust their critique? What are they not telling me? It’s my job, not theirs, to make the judgment. Should I give the competitor a second chance to explain? Why are they sticking me in the middle of a technical dispute?

Be careful also of thinking, “I’m not mud-slinging. I’m being professional, objectively pointing out important risks. I’m helping them.”

Too bad motives aren’t everything. Motives won’t change those unspoken client questions. The more you insist how clean your motives are, the more they’re suspect.

The Long Term is Not So Long Anymore

Reputations spread like wildfire on the web. Worse yet, reputations are no longer based on carefully crafted positioning statements, but on suddenly-public daily corporate life.

Non-marketing actions issues like customer service, lead screening, purchasing processes–and comments about competitors–are suddenly driving brand image.

He who tells a lie gets known as a liar. He who slings mud gets known as a mud-slinger—much faster, and much more broadly, than ever before. What goes around comes around—just a lot faster.

Be careful what you wish for: you may (or may not) win the particular argument, but you will definitely create a lasting impression—and not a good one.

The Good News in Leaving Competitors Alone

The good news is the ‘right’ thing to do is increasingly looking like the smart thing to do. Focusing on your client, that is. When trust in businesses is declining, those who act in a trustworthy manner differentiate themselves. And isn’t that what you wanted?

So how do you differentiate yourself in a sales presentation? Stop asking that question: focus on the client in front of you.

Differentiation is not about what you say about others: it’s about who you reveal yourself to be.

Collaboration as a Strategy, Not a Tactic

First, some context.

Two weeks ago I wrote an article in called Wall Street Run Amok: Harvard’s to blame.  In it, I suggested  that business schools including Harvard have over-taught competition, and under-taught collaboration—a concept more appropriate to our connected times.  CNBC saw the article and interviewed me, albeit over-playing the blame-Harvard angle.

Then, last week, Harvard Business School’s Deputy Dean of Academic Affairs Karl Kester logged in to the article and posted a lengthy rebuttal comment both there and on his own site.  Rather than further this discussion in our separate forums, I’d like to invite Dean Kester to continue the dialogue here, in this blog’s open comments section, along with others interested in the topic. Clearly the issue strikes a chord with many. 

Business Schools Have Taught Competitive Success as the Ultimate Goal

Whether you call it sustainable competitive advantage, maximizing shareholder wealth, or simply ‘winning,’ the dominant worldview in business today is that business is all about competition. Ask an MBA to provide an alternate worldview and you’ll get glazed looks.

It was not always thus. Only since the seventies have business schools made the adjective in “competitive strategy” so ubiquitous as to be redundant. Before that, ‘strategy’ had a decidedly more customer-focused tone to it—for example, read Peter Drucker. (I won’t rehash the argument, it’s in the article).

That belief system has become so entrenched that nearly any other aspect of business has become subordinated to “competitive success.” Think of any subject you like–human resources, values-based management, compensation management, employee engagement, customer satisfaction—and you will find that corporations routinely attempt to justify even the most humanitarian programs in terms of their ability to add to the bottom line. Their bottom line, that is–not that of the network, or supply chain, or their partners.

“Good ethics is good business,” they say, as if ethics demanded a currency-based justification. “Happy people lead to higher profits,” “being socially responsible is associated with higher returns on investment,” and so on.

Why must every social virtue be justified solely in terms of its ability to add to the bottom line? Why do we in business not see this  Kool Aid we have been drinking for the self-obsessing small-think it is?

This is precisely the trap into which I believe Dean Kester falls with his comments, and why this conversation needs more airing.

Collaboration as a Tactic–Yesterday’s View

Dean Kester says, in his response to me:

"Today, more than ever, business is a competitive endeavor. At the same time, management is a more collaborative endeavor. At Harvard Business School we embrace both of these truths in preparing our students to become successful leaders in business and social enterprise."

This approach–that business is about competition and management is about collaboration–is precisely the default idea in business today. It suggests that  the purpose of trust and collaboration is to help Our Team to beat Their Team; that collaboration is but a tactic in service to competitive strategy; and that collaboration should somehow be subordinated to a superordinate goal–the success of the competitor.

This is vintage Business School (not just Harvard), Jack Welch, and Corporate America ideology. 

It is an idea, I want to suggest, whose time has passed. 

Deputy Dean Kester’s above response is a perfect example of the current thinking, and in turn suggests how deeply embedded that way of thinking is. Dean Kester is hardly alone in this viewpoint.  But neither am I alone in noticing that over-dosing on the ideology of competition is starting to cause serious economic harm. Here’s where I see the new view heading.

Collaboration as a Strategy–Today’s View

Yesterday’s world—the competition-centric worldview—explicitly sees customers and suppliers as competitors, along with direct competitors.

In today’s flat, connected world, our first instinctive look at the world should not be based on the threats posed by our customers, but by the enormous opportunities available to us each if we can operate together.  In a connected, transaction-cost laden world, it is simply more economic to trust than to compete.  (See Philip Evans on a convincing presentation of the US vs. the Japanese auto industry and the power of collaboration).

What’s the alternative, you ask? Simple. Stop thinking about ‘winning,’ with its zero-sum implications and paranoid overtones.  Instead, start thinking about succeeding, something that is best achieved in concert with others, like our customers and suppliers.  We need to think more about commerce, less about competition.  The critical nexus is between sellers and buyers, not sellers and their competitors.

Trust.  Collaboration.  Success.  Cooperation.  Boundarylessness beyond the corporate walls.  Our customers are not our enemies, for heaven’s sake–they are our customers!

I am far from the first to make this point: see Is It Time to Retrain B-Schools?  Nor is this my first time: see The Horizontal Imperative from February 2007, and Collaboration is the New Competition from March 2008.

Trust and Collaboration: The New Leaders

We can’t any longer let collaboration be the handmaiden of competitive advantage—in the age of networking /globalization / outsourcing it should be a goal in itself. If collaboration in your company isn’t strategic, you’re not doing it right. It is the new Key Success Factor.

The business schools are fully capable of recovering the intellectual high ground in this area. After all, several faculty at Harvard—Heskett, Schlesinger, Sasser—along with Frederick Reichheld at Bain—are responsible for superb, highly customer-focused, original work on customer loyalty.

But the b-schools are not, as yet, institutionally leading the charge nowadays.  For now, leadership is coming from the newly emerging world of blogs and social networking—for example, from people like Chris Brogan and Julien Smith, authors of Trust Agents.  (Other key thought leaders in this area include Robert Scoble, Philip Evans of BCG, Dov Seidman of LRN, and the young-at-heart Tom Peters).

These new leaders are not just talking about social media and networks–they’re living them and driving them in real businesses.  And they are vastly more collaborative than competitive.

Let’s keep this dialogue going.  Thanks to Dean Kester for stating his case.  Now let’s talk about where we go from here.

On that note, if you’re interested in continuing the conversation about trust and collaboration with Chris Brogan and Julien Smith, as well as myself and David Maister (co-author, with Rob Galford) of The Trusted Advisor, come join all four of us at the Trust Summit to be held in New York this Friday morning (auspiciously, at the Harvard Club) at 7:30AM.

I’d love, in particular, for Dean Kester to join us, and in the interests of furthering the conversation the already nominal ticket charge is waived for him.

Click here for more information about the event and about Brogan, Smith, Maister and myself.

Click here to buy tickets for the Trust Summit event.

And bring your best collaboration skills—it’s not a tactic, it’s the whole point.

The Boston Consulting Group Caused the Recession

Like all good conspiracy theories, this one may have a few loose links.  But work with me here–it’s a good story.

The 70s: When Strategy Became Competitive Strategy

Back in the 60s, Bruce Henderson, chafing at Arthur D. Little, re-conceived competitive strategy.  He founded the Boston Consulting Group, who in the 70s introduced the world to concepts like the experience curve, the Doom Loop, and the barnyard strategy matrix

Together with Michael Porter, they redefined strategy from a vague, military idea, to a disciplined, quantitative analysis based on a Hobbesian view of the business world: a State of Nature as Competition.  Competitors lurked everywhere–including masquerading as your suppliers and your customers.  Henceforth, all talk of "strategy" would implicitly have “competitive” as a leading adjective.

It is hard to describe today the impact this new ideology had on the business community.  Suddenly the world made sense—everything was about competition, and everything was quantitative.  It was about winning, and the winner was the one who ran the numbers best.  Peter Drucker was so 10 minutes ago–now, if you couldn’t measure it, you couldn’t manage it.

The 90s: When Organizations Became Processes

In the early 90s, Michael Hammer  and James Champy wrote Reengineering the Corporation, and the other shoe dropped.   The other shoe was business process re-engineering.  Pre-Hammer, companies were functional organizations.  Post-Hammer, they were bundles of processes. 

Functional organizations were messy things that needed coordinating, leading, managing.  Processes could be broken out, modularized, tinker-toy-rebuilt, outsourced, and re-assembled—and despite Hammer’s later protestations, the idea remained attractively impersonal to its fans. 

The 00s: Metrics, Competition and Process Prepare the TinderBox

BCG, B-schools and other leading business thinkers embarked on a decade of exploring the implications.  The Holy Grail of business had become sustainable competitive advantage, which produced economic value added, which produced maximal shareholder value. 

You got there by achieving global scale in every business process: if you weren’t #1 or #2 in any process, you outsourced it to one who was.

Outsourcing to achieve scale through best practices meant multiplying transactions, reducing time-frames, and replacing messy relationships with tightly written contracts–or, better yet, markets, the truly impersonal solution.  Performance was quantitatively defined, included not only in contracts between companies, but in employee relationships with people (who were renamed “human capital” to fit the new business Esperanto—finance).  No need to inspire or manage through people; just craft a blend of  metrics and incentives, the way Skinner incented those white mice in his boxes.  Poster child: Jack Welch.

An example: the mortgage industry.  The purveyors of the competitive/process/metric paradigm saw mortgage as an industry that was regionally fragmented, structurally clumpy, high cost, stodgy, inefficient, illiquid, and highly subjective.

In 15 years, they transformed it.  The mortgage business became globally integrated, highly specialized (substituting markets for organizations via disintermediation), low-cost, nimble, cutting edge, efficient, liquid, and highly impersonal.  It became a market-driven, process-linked, globally efficient industry.  That’s all true.

It also became bereft of relationships; laden with perverse incentives; managed by serial transactors; stripped of any sense of responsibility; and governed solely by financial metrics.  In a business whose product already was money, the doubling-up emphasis on financial metrics obliterated any memory of other principles or values that might have once existed in the financial sector. 

The new mantra was IBGYBG. I’ll be gone, you’ll be gone; do the deal and let the next sucker clean it up.  The entire Meaning of Business became—to make more money than the other guys.  Period.

You work for your company–in theory, the shareholders.  Your company’s job is to win.  You win by beating others before they beat you.  Customers are walking wallets, sources of the poker chips you use to measure success.  Suppliers are to be played off against each other.  All parties are to be managed in clumps of processes, carrotted-and-sticked to behave in certain ways.  That, simply, is how it was supposed to work.  According to this mantra.

This ideology didn’t just happen.  It was four decades in the making. 

Bruce Henderson didn’t mean to do it—but he set the wheels in motion.  BCG, Hammer, Porter, and CSC-Index made it look enticing.  Economists and quant-wannabes from the HR, exec-comp and leadership world added their hops and spices to the brew.  Goldman Stanley and Morgan Sachs refined it; private equity and financial engineers distilled it; and Merrill Stearns, mortgage brokers and Joe the Plumber  got drunk on it.

Complicated?  Yes.  That’s where conspiracy theories come in; they let you simplify.  So pardon me if I just use the shorthand version: BCG caused the recession.

Ethics vs. Jack Welch at the West Point of Capitalism

You may have heard about the recent so-called MBA Oath undertaken by some students at Harvard Business School.  Do click the link, it’s a short read, but to summarize it even more, it’s an oath to behave in ethically, non-selfishly motivated, socially responsible ways.

MBA Students For Ethics and Social Responsibility?

Here’s the May 30 NYTimes story,  as of which date “nearly 20% of the graduating class” had signed the oath.  When I read that, I resolved to blog about it in a week’s time.  It was clear to me on May 30 what I was going to say:

No biggie.  In my own class (1976) it wouldn’t have surprised me if as many as 10% would have signed such an oath.  That would suggest either a doubling or a 10 percentage point increase every 35 years.  

By that arithmetic it would take either until the year 2061 or the year 2114 for 51% of Harvard MBAs to agree with such controversial statements as “I will act with utmost integrity and pursue my work in an ethical manner."  Oath?  Much ado about nothing.

Well, shame on me, o me of little faith in my descendant classmates, because as of June 3 (according to the Economist’s story), that number was up to 400—roughly half, by my close-enough calculations. 

Now, half is considerably larger than 20%.  In fact, I think it’s more like 50%, though HBS MBAs in my day weren’t all that great at math (‘go hire one from MIT if you need it’ was the not-so-tongue-in-cheek phrase we heard).  And I am quite sure, as I mentally run down my list of classmates, that nowhere near 50% would have signed the oath back in the day.

Ethical Progress at Harvard Business School?

I’ve previously critiqued the ethics course at HBS  and b-schools in general for not getting it right, but this is different—as a whole, this manifesto gets it very right.

I don’t like using superlative buzz words, but the “sea change” metaphor comes to mind.  Or, to mimic Verizon’s FIOS ad, “This is big.”

How big?  Let’s contrast it with Jack Welch. 

Welch was recently trotted out from the dead to reprise his greatest hits at a Bloomberg/Vanity Fair economic forum.  It had a shot at being an intelligent economic dialogue until Jack popped open the coffin lid and shouted “buy or bury the competition!”  thus drawing loud applause from the over-60 crowd in attendance. 

Now, GE’s stock price when Welch left in 2001 was 50; it since dropped as low as 8.  Today it’s 14.  But don’t tell me that’s the fault of his (handpicked) successors; it’s what happens when a formerly great strategy meets seriously new times (and Imelt can’t work Welch’s old opaque GE Capital magic anymore).  That applause at Bloomberg  was the sound of the old guard waxing nostalgic, still hoping to believe in the old verities.  But they’re gone, gone. 

Jack Welch, Old School: Interconnected World, New School

Jack WelchThe old strategy?  Competition, competition.  Your customers and your suppliers are your competitors.  Be boundaryless–right up to  the boundary of your own company, where it becomes bury the enemy. 

The new strategy?  Collaboration, collaboration.  It’s a flat world; joint venture, alliance, outsource, teamwork, network, share.  Your customer is your purpose for being, and your supplier is your life partner.  We’ve finally gotten past Thomas Hobbes–and just in time to deal with global warming and global supply chains.

Which strategy is right for the times?  Look at Detroit; a fervent worshiper of the Competitive Gospel.  According to Welch, Detroit’s downfall was unions, pension laws and health care.

Booshwah; Detroit’s Achilles’ heel was an ideology that, unlike Toyota, pitted them against their own suppliers in an era where supply chain relationships proved the key to lower systemic costs; where one team measured "long term" in 3-year cycles, and the other measured it in generations.

Dealing with GE today is still like dealing with Welch.  They’d rather do reverse online auctions than engage in relationships.  They are shooting their own economics in the foot by declaring,  like old Bolsheviks, "we will bury you" at their fellow commercial travellers.

Me, I’ll bet on the new kids in town, who understand 1+1 >3,  and 1 vs. 1 <2; who say things like

>I will safeguard the interests of my shareholders, co-workers, customers and the society in which we operate.
>I will manage my enterprise in good faith, guarding against decisions and behavior that advance my own narrow ambitions but harm the enterprise and the societies it serves.

Good for you, HBS class of 2009.  I say you done us proud. 

Competing With Your Supplier is Not a Best Practice

Fortune’s Geoff Colvin writes in the July 21 edition about Gary Reiner, GE’s CIO, in Information Worth Billions: General Electric’s CIO Tells How He Makes Infotech Pay In a Big Way.

Reiner reports directly to Jeff Immelt, GE’s CEO. Immelt wants three things from him—one of which is sourcing. Says Reiner:

"…we were one of the first to do e-auctioning. Our job would be to commoditize the item as much as possible and then leverage IT to have our suppliers bid for the business.

Of course, Reiner says that though GE loves to buy through reverse auctions, it hates to sell that way.

"…the more commodity-like the part or service is, the easier it is to auction; and the more differentiated, the less easy it is to auction…we try to make more of our business portfolio be products and services that are non-commodity—that are differentiated. So we are not as auctioned on the sell side as we are on the buy side.

All well and good. And of course (insert here your favorite paragraph on the fabulous track record of GE, Jack Welch, etc.).

And yet, and yet…

I’m left with the inescapable feeling that Reiner—and Immelt, and GE—view business as being exclusively and exhaustively about competition. Including competing with your suppliers. And competing with your customers.

With suppliers, it’s about extracting the best price from an auction. With customers, it’s about extracting the best price by avoiding an auction.

In both cases, it’s about extracting maximum price in a zero-sum transaction whose boundaries are limited to product features, product quality, and price. What’s good for me is not good for you, and vice versa. We are inextricably opposed.

If that sounds perfectly obvious and normal to you, then think about what’s missing.

A relationship. An approach of collaboration. A view that this transaction isn’t a carefully negotiated one-night stand, but rather a joint journey. A view that gets beyond mere product characteristics and price. A sense of commitment to customers or suppliers. A feeling of responsibility for the health of both parties. A willingness to pool information, rather than use it as a wedge.

That’s some of what’s missing.

Let’s call GE’s view the “competition-centric” view. It was given intellectual expression and validity by Michael Porter in his 1978 classic Competitive Strategy. In that book, Porter laid out quite clearly the nature of business: it was to compete. And the nature of competition was equally clear. There were five competitive dynamics facing the firm: two of those five were the competitive struggle between the firm and its customers, and the firm and its suppliers.

In other words—business, by this view, is quite specifically about competing with your customers (and suppliers).

This view is not “wrong” per se. It helped a lot of companies—including GE—to survive and prosper.

But this is not your father’s business world. Nor Jack Welch’s. Not any longer.

Today’s "flat" business world—30 years after Porter—is about extended enterprises, not hard-walled corporations. It’s about supply chains, not about monolithic vertically integrated organizations. Best practices today are about collaboration, not competition; about influencing, not managing; about commercial relationships, not competitive ones. It’s about 1+1=3, not "do unto others before they do unto me."

Those who succeed today aren’t those who play “hardball,” but those who learned early on to play nicely in the sandbox with others. Because in today’s business world, there is no longer any separation worth the name; in a globally scaled world, everyone outsources pretty much everything. A competitor today is a collaborator tomorrow and a customer or supplier on alternate Tuesdays.

Exhibit 1: the auto industry. Toyota has a genuine cost advantage over Detroit because it has always treated its suppliers as an extended organization—not as enemies to be kept at bay and bled nearly dry. That collaborative advantage is the competitive truth—not the self-serving excuses (by Welch, among others) about health care and pension costs (which were after all freely signed into contracts by Detroit management without a gun to its head).

Yet the dominant business ideology in the West continues to be—competition. These antiquated belief systems are increasingly at direct odds with the horizontal, extended, diffuse, globally interdependent world we now live in.

And of course, that’s how it works. Beliefs die hard—well after the conditions that birthed them are long gone. Ideology is the last vestige of a changing world.

Competing with your customers? If that was ever a “best practice,” it should now be relegated to an increasingly bygone world. It’s not “bad” or “wrong”—it just doesn’t work as well anymore. And that trend is only increasing.