Digitally Enabled Harmony: The Organizational Model For The Post-Management World.

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There is a deepening appreciation of the business firm as a complex evolving system (CES). The behavior of such systems can be understood through the lens of universal laws that have been discovered over the past 75 years or so of systems science studies. The findings of these studies point in a very different direction for the optimization of performance of firms than the traditional processes and methods of direction and control that fall under the heading of contemporary business management.

The mental model to replace management direction and control is harmonization – the unburdened harmony both of the firm interacting with its external environment (markets, customers, suppliers) and harmony within the firm between producer teams. The harmonizing catalyst is value – creating value for customers, and value and meaning in work for employees. Value acts as a coalescing unity (it’s what brings the firm and its markets into alignment) and provides a congruent shared meaning (everyone in the firm is devoted to value creation for others, and customers, partners and suppliers are collaborators in this purpose).

In the language of systems, value is the governing constraint. Constraints are a favorable influence on systems, shaping their development in the direction of collaboration, co-ordination and coherence. Constraints can be norms or cultural guidelines, or feedback loops, or conceptual frameworks, or even standards or processes, that lower barriers to value creation. Constraints bring about effects by channeling and facilitating value flow. They are the conceptual opposite of management structures and command and control philosophies: they are freeing rather than restricting.

The right governing constraints result in harmony, the productive emergence of (1) collective shared meaning (cognitive and emotional harmony) and (2) collaborative unity (behavioral harmony). This harmony unites both the internal and external environment: customers, suppliers and partners are as aligned as are internal functions.

The organizational unit for the harmony model is the team. Teams are deployed to develop solutions to problems that an individual can’t achieve. The members have multiple, complementary skills and a common task or goal. They collaborate to discover how best to work together for the common goal. They can exist within an assemblage of teams – teams of teams- embedded within the larger context of a firm or a corporation, and they are self-organizing in that context. The firm provides the governing constraint of shared intent and shared norms, while the teams operate in a bottom-up mode to affect the whole firm and improve system performance. 

Harmonized teams

Teams develop a capacity to act as a network of people, things and narrative (shared meaning). They are characterized by fluidity of interaction and exchange. Individuals on a team are interdependent, and multiple teams can be interdependent with each other in the team of teams. Interdependency can cross boundaries (e.g. the marketing team might embrace both finance and operations) and between levels (e.g. combining planning and execution) because it is the quality of interactions that matter, not the structural arrangement of resources. 

The Data Layer

The critical resource for teams to achieve high quality interaction is data from the environment. When information is rich and free-flowing, the quality of team interactions is increased; knowledge gaps are rapidly closed and feedback loops enable error correction and adaptation. In systems theory, higher team performance resulting from the flow of data is termed The Law Of Increasing Functional Information (LIFI). 

In the context of firms needing to achieve competitively superior delivery of value to customers, they are called upon to continually improve their value function. To do so, they gather and process functional information – the data that tells them how to create value, how well they are creating value at present, and how to improve value delivery in the future. The more functional information they can collect and flow through the company, and the better they can process it, the higher their value creation performance. There is a selection process at work: the market selects those firms and value propositions that are most functional – most valuable – for them. 

Digitally enabled harmonization

A new organizational model has emerged to make harmony the catalyst for firm-level performance: digital enablement. It has the following components:

  • A direct connection to the external environment – to customers, partners, suppliers. This is the key transformational influence: the direct connection to customers and markets is the factor that has unleashed new business models such as those of amazon, AirBnB, Netflix and many of the exponential growth businesses of today.
  • A data layer to collect and organize the inflow, applying A.I. and machine learning to identify patterns and insights, before human factors are applied. By routing data through the data layer and associated analytical software and models, insights can emerge spontaneously before the application of human judgment. 
  • An unstructured assemblage of functions that utilize the insights from the data layer to elevate value creation in their own domain: operations, commerce, service delivery, customer relationships and engagement, marketing and brand building. The functions develop a collective intelligence that increases the value performance of every project, team and individual.

The core components of digitally enabled harmonization are:

  • Philosophy: all good businesses start from sound philosophy. Digital harmonization is founded on a philosophy of value, nurtured by customer information, and enabled by the direct connection from customer to firm, without intervening barriers or distorting judgment.
  • Information flow: in information theory, more data, processed more quickly and analytically, can drive value, so long as noise and equivocation are eliminated or reduced. The direct digital connection to the market supplies the flow and the A.I. and M/L processing provide the clarity of insights. Speed of response is important but not primary: clarity is the key.
  • Self-organization: teams self-organize by identifying entrepreneurial goals for pursuing new customer value, combining knowledge, skills, resources and tools. The science of self-managed teams in the pursuit of customer value goals has become well-developed in agile software development, and the principles are fully transferable across all functions and projects. No central control is required, and improved results stem from the bottom up, rather than from top-down strategies or planning. The higher-level intent of the firm is realized through lower-level initiatives.
  • Value: the primary governing constraint is value, the experience of greater well-being. This is what customers seek, so value creation by the firm generates the positive feedback loop – through the data layer – of revenue and profit as well as customer satisfaction and loyalty. It’s also what employees, associates and partners seek: meaningful work, creating value for customers. 
  • Generative culture: the critical human-in-the-loop component is active in functions at the team level, where creativity and imagination harnessed to insights generate new initiatives and implementations for testing and expanding in the marketplace. Performance-oriented teams are motivated and united by shared meaning and enjoy the collaborative participation in the pursuit of new customer value, and the collective learning via the active feedback loop. Interoperability across teams and across functions further strengthens the generative collaboration. 

References

Alicia Juarrero: Context Changes Everything: How Constraints Create Coherence; MIT Press, 2023.

Johan Ivari, Annette Nolan: Team Up For Success: Harnessing Participatory Sense Making; Swedish Defence University, 2024.

Cooperative Consulting: Digital Enablement: Helping growth-minded clients accelerate into the Automated Economy, 2024

Read Aberrant Capitalism To Understand How Corporations Give Capitalism A Bad Name.

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In Aberrant Capitalism, Steve Denning and I ask why perceptions of and opinions about capitalism have eroded to the point that some young people are willing to say they would choose socialism in its place. That’s irrational based on the objective outcomes: capitalism is the economic system associated with the greatest growth in well-being in all of history.

Upon further examination, it turns out that the criticisms directed at capitalism are provoked mainly by one of the system’s forms of implementation and not by the system itself. Corporations are the entities that pay wages and salaries (therefore creating income equalities), create shareholder wealth inequality (since they are the ones issuing shares and driving up their trading value), and cause environmental degradation. Corporations are viewed as cold, calculating, exploitative, and indifferent to social issues.

Aberrant Capitalism examines the roughly 160-year era of the capitalist corporation and maps the entropic decline from a golden age of celebration to an age of disdain. Corporations were a timely, enabling innovation for capitalism in the second half of the nineteenth century, making possible the achievement of scale and scope that brought illumination, transportation, communication, mechanization, health, and nutrition to customers in America’s, and then the world’s, homes and factories. These were the corporations of entrepreneur owners, unentangled with government or a financial sector, focused on customer benefit. The golden age of corporations was an age of customer capitalism.

But when the entrepreneurs exited and managers entered, systemic erosion began. Not immediately—the first generation of managerial capitalism exhibited several examples of further advances in customer capitalism. But managers pursue different goals than entrepreneurs, including control, consistency, and efficiency. They seek to erase entrepreneurial uncertainty, preferring predictable outcomes to creativity. Command-and-control management systems began to emerge, bringing bureaucracy with them.

Two war economies – World War I and World War II – and the New Deal significantly accelerated the shift to central planning as a form of management both in government and private industry and also served to entangle those two together. After World War II, executives who had been called into government to run War Boards and planning agencies, with all their pervasive controls over production, prices, and resource allocation, moved back into industry. They reproduced the centralized government bureaucracy in the strategic planning arms and bureaucratic structures of companies like GE and IBM. 

Later in the twentieth century came the expansion of the financial sector and the change in purpose of the corporation from generating subjective value – a feeling of well-being and satisfaction – for customers to maximizing value for shareholders (MSV) – a mathematical calculation for a very narrow group of investors, and for the managers themselves who awarded themselves stock and stock options so that MSV served them as well. It was not unusual for corporations to utilize more than 100% of their net earnings as stock buybacks and dividends rather than invest in R&D for future customer benefit.

The major protagonists of the capitalist system have become internally-focused, bureaucratized central planning organizations, with rigid structures, entangled with government, and beholden to investors and stock markets more than customers. Many people despair of them, and hope for something better.

There is some prospect for hope in the digital age. It is the nature of the new digital firms that change is initiated from the bottom up and the outside in because customers have direct access through the new business models of the era, and their preferences can be transmitted to the corporation more effectively. But the new corporations are paradoxes – more customer-centered than before, more responsive and agile, but still bureaucratic, still government entangled, and more able to exert control through their business model’s data collection and machine learning components. The promise of the digital era is to lead us out of a period of aberrant capitalism – but the forces of centralization, bureaucracy, government entanglement, and financialization have not been defeated. 

Aberrant Capitalism proposes a new integration of entrepreneurship and management – “entrepreneurial management” – as the potential resolution.

  • Introduction: Corporations are the primary protagonists of capitalism

The real target of critics of capitalism is corporations, not capitalism itself. Corporations were an emergent phenomenon of the capitalist economy from the second half of the nineteenth century – there was capitalism before the corporation. Corporations grew and evolved in ways that were favorable to the well-being of customers while at the same time self-serving and value-extracting on behalf of management and shareholders. This duality is beginning to tip in favor of the corporation at the expense of the customer and society.

  • Capitalism Before Corporations

There was plenty of capitalism – commercial business activity to create new value by serving customer needs profitably – before corporations came along. Richard Cantillon and Adam Smith both wrote about it. As an empirical example, Aberrant Capitalism highlights Wedgwood and Bentley, a partnership (the most prevalent form of organization in the pre-corporation era) operating in the pottery industry. Wedgwood and Bentley exhibited the customer-oriented mindset of capitalism by continuously innovating to improve both the functionality and appearance of tableware while at the same time lowering prices to broaden accessibility to more and more working families. At the same time, the firm recognized new opportunities for market segmentation, with a different product line at various price points for aristocracy and royalty. Wedgwood and Bentley innovated in the application of technology, new production systems, new ways of organizing, and new marketing techniques, including retail display marketing, sampling, and free shipping / free returns.

But Wedgwood and Bentley never became a big business. The partnership could not realize the scale and scope of the corporations of the future.

  • Entrepreneurial Ownership and the Golden Age of Corporations

The new form of corporate capitalism emerged in the second half of the nineteenth century. New legal institutions shaped the corporate form, while at the same time, the entrepreneur owners of the corporations learned that service to the customer and value for the customer were the drivers of their success. People were engaged in creating a new context and new modes for living: not just a market of unprecedented scale, but new geographical reach, new connectivity via railroads and telegraph, new technologies to utilize, new ways to collaborate and exchange, new shared experiences and new shared realities, a new dynamism and a new mentality about what was possible.

The corporate form was essential to aggregating the unprecedented amounts of capital and operating funds required for large-scale railroads, factories, mills, refineries, and pipelines. Corporations were an organizational innovation that addressed customers’ needs for transportation, banking and insurance, energy, water, food, and clothing as they expanded cities and ventured into new territories. Corporations competed in the industries of the future.

Quaker Oats, Sears Roebuck, Procter and Gamble, and Standard Oil are a few of the numerous corporations highlighted as examples of customer capitalism. Standard Oil? Yes. Historian Paul Johnson wrote that “no other has done so much for the ordinary consumer” and picked out John D. Rockefeller as one of the “prospering fathers” – entrepreneurial individualists who transformed the nation and the world – and not a “robber baron”; after all, whom did he rob?

Notably, the rapid growth of the large corporations was funded primarily via cash flow and retained earnings, and the financial sector held no great sway. The corporations were entrepreneurially creative, dynamically efficient, self-funding innovators and price reducers, unentangled with government. It was a golden age.

  • The Early Twentieth Century– One Step Forward, Two Steps Back

In the first part of the twentieth century, the management organizations that had inherited control of corporations from their entrepreneurial founders and leaders made further advances in customer capitalism via multiple innovation streams. Aberrant Capitalism highlights Siemens organizational innovations in Germany, GM’s multi-divisional market segmentation, and P&G’s invention of the brand management system, where each brand manager was an entrepreneur, and the purpose of each brand was to understand and serve customers.

But there were two major developments that dramatically changed capitalism and pushed corporations in a new direction. The regulation economy of the New Deal and the command economy of World War II changed the attitude of both businessmen and consumers toward capitalism. Capitalism was not the same afterwards.

Politicians declared that the economic downturn of what we now call the Great Depression constituted an emergency of the same character and same dimension as war and claimed emergency powers to intervene. In a barrage of legislation, regulation, and presidential proclamations, government battered down the normal barriers separating business corporations from political control. Politicians even changed the descriptive language of capitalism. “Competition” became “economic cannibalism,” and “rugged individualists” became “industrial pirates.” 

The coming of the Second World War exacerbated the already centralizing tendencies of the New Deal, with more central planning and control in the government-led establishment of a war economy. Aberrant Capitalism details these controls. As economist Joseph Schumpeter said in 1949, “We have traveled far indeed from the principles of laissez-faire capitalism.”

  • Post-War Capitalism: The Age of Control

Historian Jonathan Levy identifies the “dramatic post-1945 hinge” as the most important moment in the history of American capitalism. Capital, in the form of industrial manufacturing, was productive but illiquid and inflexible, and profits were reinvested mostly in existing business lines. Corporate management became an educated and trained bureaucracy. Aberrant Capitalism employs data from General Electric Company (GE), from the post-WW2 period to the 1980s, to represent corporate managerialism and its vast internal central planning machinery. It produced an opacity so dense that the CEO, Reg Jones, admitted that “we could not achieve the necessary in-depth understanding of (our own) 40-odd SBU plans.”

Nevertheless, GE’s implementation of control capitalism gained the company the status of “most admired” (Fortune magazine) and “most respected” (Financial Times). The big businesses of the era adopted the control-oriented model, albeit occasionally executed in different ways.

One consequence of the heavy weight of management was what Nobel prize-winning economist Oliver Williamson called managerial slack: a preference for adding costs that did not increase customer value. Slack included high salaries and benefits for management, large office spaces, unnecessary staff, inflated advertising budgets, and even R&D and M&A activities designed to enhance personal power more than business performance. Organizational slack hardens into a permanent increase in the corporation’s cost base via the annual planning and budgeting process, subordinating customer objectives to managerial objectives.

  • The Age of Financialization

In the later years of the twentieth century, the expansion of the financial sector and the frenzied decoupling of financial capital from production capital has resulted in the financialization of the corporation. This includes the elevation of the stock market and other financial market institutions and components to a position of strong influence over the allocation of resources that causes a shift away from long-term reinforcement of productive and innovative enterprise and toward short-term financial performance goals, undermining the innovative capability of the industry.

Financialization is a fundamental undermining of the purpose of the corporation. The corporations that had shown a pattern of investing in organizational learning and strengthening their capacity to innovate since the nineteenth century turned to speculative manipulation of their stock prices on stock exchanges. Aberrant Capitalism examines stock buybacks as an example of this self-dealing, and GE 1980-2001 as an example of the distortions exhibited by the financialized corporation.

  • Institutionalized Control

Institutions are the formal and semi-formal rules and conventions regarding business conduct and guiding business behaviors. Today’s institutions provide a framework for shifting the focus from customer value creation to shareholder and investor value capture.

Financial institutions: The institutional role of stock markets has transformed from the support of entrepreneurship to an emphasis on cash distributions to share traders and top management through buybacks and dividends, which contradicts the original concept of capitalism. Venture capital is an institutionalized dash to stock appreciation. The stock ownership cartels of Blackrock, Vanguard, State Street and others like Berkshire Hathaway support the idea that the corporate purpose is the accumulation of appreciating stock and dividend flows.

Management institutions: Business schools and business publishing, the institutions for propagating, standardizing, and communicating business philosophy, business practices, and business methods, have enthusiastically embraced the primacy of the financial sector, the financialization of corporate purpose, and the shareholder value maximization thesis. The entire concept of business strategy, as taught in many business schools and propounded by some consultancies and authors, is flawed by its outcome bias toward maximizing shareholder value.

Bureaucracy is institutionalized slack that wastes time, breeds inertia, shelters corporations from customer feedback, and hoards power and control. Capitalism is carried out within large organizations in which the upper echelons of bureaucracies in the productive and financial sectors are effectively fused in the pursuit of new ways to monitor, control, manage, and surveil rather than pursue value creation for customers.

Political institutions and the entanglement of business and government: Antitrust laws, financial regulations, ESG, DEI, and taxation manipulation can all lead to the diversion of value from customers, and the revolving door from the top of government agencies to the top of management organizations exacerbates the problem. We highlight SEC Rule 10b-18 as a particularly consequential example.

Prevailing economics: Entrepreneurial value creation is not recognized as a system driver in mainstream economics. The emphasis is on centralized planning and bureaucratic and regulatory control of variables to dampen economic fluctuations. The same stabilization mentality is transmitted to corporations, encouraging cost controls, process management, and risk mitigation. Corporate collaboration with the public sector is a favored strategy in bidding for government contracts, participating in public–private partnerships, and lobbying for sheltering legislation.

  • Reimagination

What is to be done? Aberrant Capitalism frames the action plan as reimagination.

Restoration of the Primacy of the Customer: A newly reimagined corporate capitalism must restore the customer to a primary position before shareholders, governments, or management. The customer is the source of energy in the capitalist system of value creation and betterment – it’s their desire for improved well-being that is the driver. This mindset has been lost. Restoring it would bring us business models that prize customer value over shareholder value, dynamic innovation over predictable, smooth earnings, and long-term growth horizons over short-term asset appreciation and payouts.

The energy of customer primacy was fully evident in the golden age, but current corporate ideology violates all three of these business model characteristics.

Reimagining the economics of capitalism: In economics, the process of value creation is known as entrepreneurship. This term has lost its original meaning of undertaking the uncertain task of creating new value for customers. In the popular vernacular, it has come to be associated with the launch of new firms and the management of small businesses. But, as the pursuit of new economic value on behalf of customers, the economic function of entrepreneurship should be the corporation’s primary focus. 

For capitalism to transcend the current aberrant period, it will be necessary to restore the primacy of the entrepreneurial function (something management guru Peter Drucker envisaged in 1993 when he wrote that entrepreneurship should become the “integrating …. life-sustaining activity in our organizations, our economy, our society”).

Reimagining the Relationship with Capital Markets: There are alternatives to the high liquidity, low-risk equity, short-term stock trading markets of today that are the source of the incentives behind aberrant capitalism. Some sovereign wealth funds are already focusing on long-term rolling returns (20 years for GIC, the Singaporean wealth fund), and different ownership structures (such as family or private ownership) can favor the longer-term horizon.

Reimagining management: Aberrant Capitalism records five different management ideology eras, and the digital age promises the possibility of another new one. The new management purpose is always some distinctive and differentiated variant of obsession with creating a superior value experience for customers. As a consequence of the new speed of change, management becomes more discovery than determinate, more humble than hubristic, and more uncertain than predictive. Principles replace bureaucratic rules. Leadership becomes more distributed, and organizations become flatter. Subjective calculation of future customer value means that the accounting discipline, which translates every action into numbers, is no longer the only source of management truth.

  • Conclusion

The promise of the digital age, which enables a new software-mediated direct relationship between corporations and customers, is to reverse the direction of entropic decline in corporate capitalism. There is a new dynamic in motion that points to the potential for a return to the golden age of corporations, where owner-entrepreneurs harnessed new technology for the good of customers, bending the curve of prosperity and well-being into a steeper ascent. The direction of motion in the new system is from the customer directly to the corporation via networks and software, permitting a more direct influence of customer preferences on resource allocation and management practices. 

Corporations can no longer be fortresses, defining and defending boundaries to establish dominant positions in markets or industries. They must compete on customer satisfaction, replace hierarchies with networks, abandon control for riding the wave of technological innovation, disentangle themselves from the boat anchor of government, and redefine their relationships with employees so that profit is the outcome of a satisfied customer interacting with a satisfied workforce. This is the concept of entrepreneurial management: combining the values of entrepreneurial ownership that characterized the first large-scale corporations with the harnessing of technology to directly improve the well-being of every customer and thereby achieve new levels of quality of economic life that couldn’t be contemplated back then.

Epilogue: Aberrant Capitalism

Capitalism’s reputation has been tarnished, and its true purpose distorted. The consequences are dire: a widening chasm of inequality, disillusionment, and distrust, and the empowerment of those who would see the entire system dismantled. This twisted form of capitalism stands as a stark warning of the dangers that arise when we allow the forces of centralization, financialization, and the shortsighted pursuit of shareholder value to dictate the course of our economic system. 

It is our responsibility as the inheritors of capitalism’s promise to reassert the values that underpin this system: the power of free markets to drive innovation, the potential of business to uplift societies, and the inherent dignity of labor. Only by acknowledging the threats and working tirelessly to counteract their effects can we reclaim the true spirit of capitalism and ensure a more equitable, prosperous future for all.

A nation founded on entrepreneurship.

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The American economy and society, deeply rooted in entrepreneurship, reflect a deliberate creation by the nation’s founders and early leaders. This entrepreneurial ethos, a pathway for personal growth, innovative ventures, and nation-building, served as a cornerstone for the United States. Dr. Samuel Gregg, in “The Next American Economy,” and Cyrus A. Ansary, in “George Washington Dealmaker In Chief,” both highlight the pivotal roles played by the Founding Fathers in fostering this environment.

  1. Legal and Constitutional Foundation: The Constitution established a stable legal framework essential for economic activities. It protected property rights, enforced contracts, and implemented a system of checks and balances, creating a reliable and predictable environment for entrepreneurs.
  2. Emphasis on Free Trade: Contrasting with the restrictive British mercantile system, the founders advocated for open trade policies. They recognized the critical role of free trade in stimulating economic growth and prosperity.
  3. National Currency and Central Banking: The establishment of a national currency and a central banking system was pivotal in stabilizing the economy and supporting domestic and international trade.
  4. Protection of Intellectual Property: Intellectual property rights were enshrined in the Constitution to promote innovation and entrepreneurship.
  5. Infrastructure Development: Recognizing the importance of infrastructure, the founders invested in transportation systems, such as roads and canals, vital for commerce and economic development.
  6. Balanced Regulation: While advocating minimal government intervention, the founders understood the need for regulation to ensure fair competition and protect public interests.

Washington’s approach, as detailed by Ansary, combined his entrepreneurial spirit with a commitment to embedding these principles into the national fabric:

  1. Economic System Transformation: Washington established a system encouraging innovation and business formation, distinct from the British colonial model.
  2. Nationwide Entrepreneurial Environment: Drawing from his business experience, Washington’s policies were tailored to nurture an entrepreneurial spirit across the nation.
  3. Strategic Economic Development: His vision included transforming society into one conducive to entrepreneurship, leveraging the era’s technological advancements in land development and transportation.
  4. Government’s Role in Business: Washington worked to eliminate barriers to entrepreneurship, such as compulsory servitude and debtors’ prisons.
  5. Support for Copyrights and Patents: Understanding their importance, he championed the creation of a system to protect and encourage innovation.
  6. Infrastructure and Financial System Establishment: His leadership was crucial in developing transportation infrastructure, the National Bank, and a credit system, laying the groundwork for a robust economic environment.

This dual focus on institutional frameworks and individual leadership by figures like George Washington has been fundamental to the enduring entrepreneurial spirit of the United States, a key aspect of American exceptionalism.

Economic Life After The Corporation.

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Corporations are a major protagonist in the capitalist system. We think of them as the source of the goods and services we accumulate and combine to power our businesses, furnish our homes, enable our communication and mobility, aid our productivity, entertain us, clothe us, protect us, and generally provision us both as businesspeople and consumers. 

When we think of individual items that make up the categories of these goods and services, we often think in terms of innovation: the new iPhone that didn’t exist 20 years ago, or AI chatbots and electric cars, or new clothing styles and fabrics, online shopping with same day delivery, fiber optic cable and cloud computing, streaming video and CRM systems and Quickbooks and run-flat tires. Innovation is the output of corporations.

But corporations themselves have not always been a part of the economy, or central to economic functioning. They were, in fact, a capitalist innovation. Prior to their introduction, in the second half of the 19th century, the more usual form of economics organization was the partnership. This was generally an arrangement of two individuals, sometimes a few more, who came together to collaborate temporarily on a single-purpose business undertaking. The partners typically invested their own money, and did so at one time, since they would expect to finance any future expansion out of the positive cash flow from the business. Mostly, these were small, local businesses although some proved able to generate broader appeal. 

A great example is Josiah Wedgwood, who, along with his partner Thomas Bentley, established his company as a leader in pottery, producing innovations such as creamware and Jasperware (often in the distinctive shade of Wedgwood Blue). The company had an international clientele, including Catherine the Great of Russia and the Queen of England, as well as a large base of affluent households as customers. But the partnership was not a corporation and it was never a big business. 

With the introduction of the limited liability corporation, new vistas of scale and scope emerged. Indeed, the mass production, mass distribution, mass marketing businesses of the late nineteenth and early twentieth century required the new corporate structure to make them possible. The new corporations could recruit investors widely when investors knew that their liability was limited to the amount of their investment. Eventually, stock exchanges, funds and investment clubs would become institutional supports for the growth of large corporations. The emerging corporations could contract with each other for scale implementations never before dreamed of – Standard Oil contracting with railroads to bring affordable illumination in the form of kerosene to every household in America, and Carnegie Steel (and eventually US Steel) contracting for ever more technologically advanced steelmaking equipment to raise the quality and lower of the price of steel for the construction boom across the US. The corporation was an emerging benefit for customers and consumers throughout the world economy.

But all systems can decay. Science calls the process entropy – the leakage of productive work in the form of waste and the loss of clear direction and defined purpose. In the case of corporations, we can detect several forms of entropy. The first is found in their management systems. The corporations were founded by entrepreneurs, purpose-driven individuals aiming to serve the needs of customers and receive the market’s rewards for doing so. These entrepreneurs found that the new scale and scope of operations they had brought into being required a lot of co-ordination that they could not oversee entirely on their own, so they invented management (e.g. supervisors to oversee workers) and specialized departments (e.g. for construction, operations, marketing and sales, accounting, and so on – individuals focused on specialized tasks via division of labor).

After the entrepreneurs passed on and the managers took over the reins, they transformed management systems into command-and control systems. The goals became prediction (planning and projecting business outcomes in advance), precision (no surprises), and power (coercive and administrative sway over the behaviors of employees). These command-and-control systems were dominant in corporate management in the twentieth century.

These systems, in turn, bred three more distortions of the corporate form. The first is bureaucracy, the mechanism for corporate control. Bureaucracy is not externally focused on production for customer value, but internally on control via compliance and procedures, accounting, regulations, and process management. One of the outcomes is that bureaucracies spawn more and more of the jobs and methods of control, to the point where researcher David Graeber (a professor of anthropology at London School of Economics) coined the term “bullshit jobs” to describe them: jobs that have no point implemented by individuals who recognize them as pointless and totally lacking meaning and purpose.

The second distortion takes the form of entanglement with government. This phenomenon was greatly accelerated by the war economies of the First World War and the Second World War. In these periods, government took it upon itself to allocate resources in the economy to serve war purposes rather than customer needs. One of their methods was to appoint “czars” for munitions production and the production and distribution of supplies for the armed forces, and to import CEO’s and senior executives from the private sector to put them in the czar role with command power over the productive firms in the economy. After the wars, the executives returned to the private sector, but their relationship, and that of the corporations they managed, with government had been irreversibly changed. Corporations now found that they could benefit from government protection via regulations, tariffs and laws, and actively sought them in return for considerations such as political donations, subsidized research and construction contracts, and mutually designed policies. Companies like Amazon, Microsoft and Palantir are entangled with government via their contracts for developing government IT and security and AI systems. Banks accept government subsidies and bail-outs. GM was another that accepted government funds and conceded greater compliance. The separation between the private and public sectors is no longer clear.

The third distortion can be encapsulated in the concept of financialization: the financial sector of the economy (what Americans often call “Wall Street”), which corporations initially utilized productively to fund R&D, internal investment and innovation, becomes an extractive, counter-productive and quite dominant influence, eclipsing the productive sector. Corporate priorities shift to financial quantification and away from the purpose of fulfilling the qualitative needs of customers. The financial sector demands predictable, consistent earnings on a quarterly horizon, compromising the investment firms must make in longer-term projects that may not have a pay-off for years rather than this quarter. Firms use stock buybacks to transfer their profits to hedge funds and institutional shareholders rather than fund current innovation projects. Financial markets prefer cost-cutting and budget control to meet quarterly earnings targets over creative innovation. 

These three distortions of the corporate form will lead to a much different economic landscape in the future. Today’s landscape is dominated by the major global corporate entities and their supply chains, and the financial structures that support them including not only stock markets but megabanks, giant pension funds, hedge funds and corporate finance behemoths like Goldman Sachs. Here are three vectors of change.

  1. The ascendancy of the dynamically flexible network.

Customers drive markets. They identify their own needs and then evaluate all the alternative ways of meeting them, ultimately selecting one or more as the best alternative(s) while continuously remaining open to the next new alternative that emerges from the churn of market dynamics. Increasingly today, customers have the option and ability to sort through all the possible business connections to find the suppliers and partners they prefer. They can close off one connection and switch to another and build a customized, dynamic network. Some of the connections may be to big business, but, increasingly, they will be able to connect to innovative new small and emerging firms with novel solutions. They’ll be able to shape these novel solutions to meet their own distinctive needs. The result will be a flatter network of small to medium-sized firms, highly specialized in serving customer needs, interspersed with a few big businesses providing relatively undifferentiated utility services.

  1. A new relationship with financial markets.

The conceptual size of the statistically dominant corporations today is inflated by their relationship with stock markets. It’s convenient for investors and money managers and CFO’s to bundle multiple businesses together in a single stock. Berkshire Hathaway is the poster child. According to Liberated Stock Trade Berkshire Hathaway owns 65 distinct companies divided into a complex web of over 260 subsidiaries. Why? So as to trade Berkshire Hathaway as a single stock. Amazon, Google, and Microsoft are, to a large degree, similarly structured: they operate multiple businesses under a single brand and stock umbrella. They are financial brands rather than operating brands.

Yet stock markets are no longer fundamental for the capital needs of the largest companies. Investors are trading the stock, but the companies are not raising new capital there. They’re actually pumping capital out of the corporation into the coffers of investors via dividends and stock buybacks. Stock markets are drains on the economy’s productive investment in innovation. They serve the interests of the financial sector not the productive sector. Over time, they’ll become less relevant as corporations fund R&D from free cash flow or from private sources other than stock market investors.

  1. A rise in entrepreneurship

Bureaucratization and financialization exert a significant brake on innovation in large corporations. The cost of innovation has gone up for corporations – the cost in time and administrative burden, as well as the sheer deadweight of size that compels the undertaking of larger and larger projects to move the behemoth’s needle. The opposite is true for entrepreneurial projects in smaller and more nimble companies. The cost of entrepreneurship is coming down in small and medium size businesses. Without the bureaucratic overhead, small and medium businesses can quickly experiment with new value propositions, test and explore with real customers, respond to feedback and expand and grow agile new businesses and brands quickly. The cost of operations is greatly reduced by the advent of AI and plug-in supply chains from the Internet. A new business can be tested, launched, expanded and made profitable before the large corporations have completed their budget meeting.

These three shifts will not herald the end of the presence of the corporation in the economy, but will relegate corporations to a subsidiary, residual role.

Customers don’t have problems to solve. They have imagined futures that are better than today.

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One view of how businesses succeed is that they solve the problems that people need solving. That’s the “jobs to be done” school of thought, popularized by Clayton Christensen and embraced by many others. This school of thought pictures people’s lives as being full of problems, and the role of entrepreneurship and innovation as fixing them.

Do consumers buy a subscription to Netflix because they have the problem of being bored or repulsed by alternative content? Do startup companies buy cloud services from AWS because they have a computing problem to solve? Does Mom buy frozen dinners to solve the problem of what to feed the kids?

No. It’s the wrong mental model – the wrong way to think about the demand side of economics and the role of businesses in our lives. The energy of economic growth derives not from the negativity of thinking about problems but the positivity of thinking about opportunities for betterment. The capitalist business system is powered by customers’ imaginations. They see the possibility of a better future, a set of circumstances that is different from and preferred to the current state. They imagine this desired state, not so much as a set of features, but as to how they will feel in it. Today’s circumstances may be fine, but there’s always that inner voice that thinks, “Things could be better.” When it’s really important, “Things that matter to me could be better.”

It’s purely an act of creativity. It’s what social scientists call “counterfactual”. People are imagining a future that doesn’t yet exist, yet they can conjure up the future feeling in their mind. There might not even be the possibility of it existing today, because it requires an innovation to bring it about. How brilliant is that? It’s the same level of imagination that Einstein employed to think about relativity and  Niels Bohr used to think through quantum physics, when relativity and quantum theory didn’t yet exist.

It is cognitive acts of counterfactual imagination that drive civilizational advance, the unrelenting seeking of human progress. And the same counterfactual imagination drives commercial innovation, from the iPhone to new flavors of breakfast cereal. Things could be better. Our phones could cease to be tethered so that we can talk on them while walking. They could cease to be clunky so that we can enjoy the elegance of design. They could help us do multiple tasks so that we can carry one device instead of many. Users didn’t invent these functions. Users made them possible by imagining the world as a better place – more convenient, more amenable to our preferences for convenience and speed and aesthetics. By being open to new value propositions, users bring new value into being. 

The other face of the customer’s imagination of future value that’s better than today’s is entrepreneurship. Entrepreneurship is the business function that turns the customer’s imagined future into commercial new reality. Entrepreneurship is the second stage of innovative genius, the stage that responds to the customer’s initiation. Entrepreneurship is the imagination of not just the future feeling of satisfaction that the customer feels, but also of the product or service or proposition that delivers the satisfaction. Entrepreneurial imagination becomes more and more substantive over time. It starts with an idea – “what if we were able to….” – that’s framed in an incentive: there could be a significant economic reward from the customer if we are successful in realizing the idea as a deliverable product or service. The process moves from idea to concept to some kind of early-stage artifact (the sketch on the back of a napkin) to prototype and MVP and test market. At every stage there’s a check-in with the customer who is imagining a better future: is this idea / concept / artifact / prototype / MVP aligned with your imagination? Is this what you were thinking? (Because, of course, they don’t “know” what they were thinking. What they had in mind was an abstract desired state. But when prompted with an artifact, they can respond – yes, that sorta/kinda points in the right direction. Such encouragement is sufficient to fuel the entrepreneurial development process.)

There’s an ultimate test of the alignment of the new value proposition with the imagined future state. It’s willingness to pay. If the customer is willing to make an exchange of something valuable to them – usually money or some derivative of money like a credit card payment, but also their time and effort – in return for the new product or service, it must, by definition, feel to them like it will bring about their imagined future state, or at least part of it, or, at the very least, provide a useful test of the viability of reaching that desired state through commerce.

People buy Tesla EV’s. Businesses buy AWS cloud computing services and harness Microsoft’s AI tools to help them succeed. These are all innovations that stimulate the customer’s imagination of a better world – an emissions-free transportation system that counters the trend towards climate change; a world of easy access for all businesses to the most advanced and robust computing power; a world of new learning and experimentation. These are all imagined first by customers – “these things that matter to me could be better” – and then by entrepreneurs in response. It’s not a linear progression, of course. Perhaps the first act of imagination that ultimately led to EV’s was the thought that air pollution from tailpipe emissions is unpleasant. That meme becomes a vector in a complex system where EV’s emerge from an unfathomable number of interactions and consequences and further interactions and new experiments and news cycles and conferences and scientific advances. We can’t untangle it. Reductionism no longer applies. There’s no cause and effect. But EV’s wouldn’t happen without customers imagining a better world in the future.

There’s no place for management any more. What will replace it?

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The Drucker Forum has put out a call to management scholars, executives and consultants to “reframe management”.  The existing management model that dominates today’s business practice and education – Drucker Forum calls it the “inflexible machine-management model” – is at odds with today’s complex and unpredictable world. Therefore, they propose, let’s replace this model with another, “The Next Management”.

A more appropriate step would be to recognize that management as a concept is no longer needed and no longer valid. There should be no “management”, whether the old model or a new one. When business sensed the need for management as a rational approach to bring order to the new scales of mass production, mass distribution and mass marketing that the Industrial Revolution made possible, the science of complex systems had not been formalized. This science, specifically the science of complex adaptive systems or complex evolving systems is genuinely new. The business world didn’t have its insights and findings when management was invented. They had Newtonian physics; economics aspired to be like physics; and management looked to economics for initial guidance. 

We now have the opportunity to learn from the latest advances in systems science.

Business firms, industries and economies can themselves be viewed as a member of a class of complex evolving systems. Evolving systems display these three attributes.

1. They are composed of numerous diverse and interacting components that have the potential to combine in vast numbers of different configurations – a multiplicity of emergent structures. It is impossible to predict the configurations that will emerge, which will be successful, which will survive and which will die.

2. The multiplicity of new configurations is autocatalytically generated, simply from the interaction, combination and recombination of the components. More firms are born than survive, more projects and business models are created and tested than actually persist and become established.

  • The term autocatalysis introduces one of a number of related principles from systems science that are fundamental for emergence: self-organization, autopoiesis, self-creation. They all relate to the idea of evolution: that there is constant endogenous change that has its own energy and can’t be stopped or even influenced by exogenous forces.

3. In the multiplicity of new emergent configurations, as in evolution, there are winners and losers, those that survive and thrive and those that don’t. Winners are established through a process of selection. Configurations are preferentially selected based on function (sometimes referred to as fitness, as in fitness for a purpose).

Among business firms, the function that is selected is the creation of value for customers. The market is the selection mechanism, through customers’ willingness or unwillingness to pay for value.

The functional capacity for value creation is determined by functional knowledge – knowledge of what actions are advantaged in value creation. There is actually a scientific law in play: the law of increasing functional information, that the system will evolve (its functional information will increase) if many configurations of the system undergo selection for function. Firms are knowledge building systems utilizing experimentation to generate new knowledge.

Therefore, the function of “management” – which can be thought of as an arrangement to attempt to bring developmental order to a firm, making the results it achieves more predictable and controllable – is replaced by experimentation, a number of concurrent trials, tests and bets with no attempt to predict or control outcomes since no predictability is conceivable. 

There’s an equivalent in economics, which is entrepreneurship: action under absolute uncertainty. Entrepreneurship is a mindset of imagining multiple possible futures and setting in motion a selected set of experiments from which one of those futures will autocatalytically emerge through the mechanism of creating value for customers, a value that is unpredictable from the entrepreneurial perspective because there is too much swirling change in the evolving ecosystem for any prediction or estimation.

Management as a rational approach to bring order has no role to play. Decision problems are no longer well defined, and therefore not amenable to rationality. The challenge is to translate knowledge and expertise into new experiments, without predicting how they will work or what the payoffs might be. This challenge can’t be conceived as management in any form. Entrepreneurship is the method to establish new starting conditions for new value creation, and market selection will take care of future allocation of resources between winners and losers.