STRATEGY & INNOVATION ARTICLES

GM and Chrysler are moving toward their fates with the inexorability of a Greek tragedy. Rick Wagoner is an unlikely candidate for a tragic hero, but he fits the requirements perfectly: he knew the prophecies and was nominally in charge of the last, best chance to save GM outside of bankruptcy. Despite the best of intentions and efforts, he failed. Now bankruptcy seems almost inevitable.

What is it about large, successful organizations that makes innovation within them so difficult? Charges of greed, complacency, and arrogance against the top executives may have merit in some cases, but they explain nothing.
 

Systematic innovation

All evidence is that the problem is systemic — such organizations are perennially unable to disrupt themselves innovatively. And, if the constraints against disruptive innovation are systemic, then an equally systemic process of destruction and renewal is required to combat them. At the market level we call this process capitalism; at the firm level it is systematic innovation.

The best exponent of systematic innovation is nature; ecological models are helpful. In Figure 1 below, the organizational ecocycle shows the trajectories followed by a typical successful firm (an outline of this dynamic is available here).

Figure 1

After a messy process of conception, enterprises are born in trust (bottom left). Once the recipe for success has been discovered, organizations grow through the use of management logic and mature in power (the system of hierarchical authority, which is essential to running a large-scale organization).

As large firms accumulate power, however, they become systemically constrained by the embodiment of their recipe for success in structures such as physical facilities, production systems, union agreements, organizational hierarchies, promotion policies, government regulation, and every other element of a corporate bureaucracy. Collectively these features are designed to perpetuate success within the existing arrangements; however, they permit only incremental change. Thus they also render the firm vulnerable to disruptive change. Worse, these strengths may become weaknesses as circumstances change to favor disruption.

Unless the organization has undergone systematic renewal, it begins to decline in a cyclical tempo, with periods of crisis interspersed with apparent recoveries. Detroit’s Big Three probably entered this phase in the 1970s, catalyzed by the oil shocks of that time, and have been cycling in it ever since. Currently Ford is at the zenith of the right-hand whirlpool cycle; GM and Chrysler are at the nadir.
 

Ecological dynamics

The ecological perspective suggests a possible process of renewal, starting in destruction (lower right) and proceeding through the logic of leadership and the restoration of hope, confidence and cooperation to get the organization back to a community of trust (top left) — the soil in which innovation and entrepreneurship grow. Natural systems use crisis to renew themselves: some forests use fire, others wind and insect attack. Mangrove swamps thrive on hurricanes; rivers must flood. New growth can take place only on edges and in open patches, where there is easy access to sun and rain.

Thus systematic innovation begins with acts of power — crises — to break the constraints that bind the system. Managers of fire-dependent forests have learned to use prescribed burns to renew them, creating small fires on their own timetables to avoid larger fires on someone else’s. So it must be with human organizations; acts of power are needed to rupture the web of constraints that have built up, and to protect the open patches where small-scale experimentation can take place. These “prescribed burns” need to be frequent and on a small scale.

There are two different kinds of logic required to run and systematically renew an organization. If the logic of management is the technical, instrumental logic of the firm as a system, then the logic of leadership is the values-based, human logic of people in their role as architects and designers; creators of their world, not just rational utility maximizers. Thus effective leadership affords people opportunities to cooperate and to create. These logics are captured neatly by Clayton Christensen et al’s “Agreement Matrix” in their article Tools of Cooperation and Change (Harvard Business Review, October 1, 2006). It indicates that the role and use of each logic depends upon the extent to which people agree with the purpose of the organization and the means employed to achieve it.

Figure 2

Dropped into the middle of the ecocycle, the 2x2 in Figure 2 becomes dynamic. It suggests that, at the birth of an enterprise, people share agreement on the purpose of the business but may have little accord on the processes — the means to achieve their goals. At this stage the necessary tools are leadership to build and maintain cooperation and purpose, and the exercise of power to get things done. As processes are borrowed and discovered and the organization grows, procedures and protocols that embody that power become essential to coping with increasing scale (the logic of management). The importance and influence of culture tools begins to grow as a history of success accumulates, affirming what the organization is and has accomplished.

With success and large scale, agreement on processes will be high but, once the founders are gone, the original mission of the firm may gradually be forgotten. Visceral, qualitative appreciations of customer needs are steadily replaced by abstract, quantitative summaries. Among GM’s senior executives the concept of an automobile morphed slowly from being an object of passion to being merely a means to success and power. This trend was abetted by the appointment of a steady stream of CEOs from the finance function, Wagoner’s own route to the top. For GM, making money became regarded as an end in itself. The recall of Bob Lutz, a genuine “car guy,” to the upper ranks in 2002 was much too little and at least twenty years too late. What had once been a culture built around purpose had long since become a culture based on means: GM had lost its memory.
 

Toward a sustainable organization

The pathway to a sustainable future points upward. The challenge is to use the twin logics of management and leadership to navigate between trust and power and to avoid being sucked into the spiral traps at either extreme. On the left is the entrepreneurial trap — lots of churning and ideas, but nothing with promise emerges from all the activity, so it has the virtue of being a self-liquidating process. On the right is the far more insidious success trap — a systemic inability to reconsider the roots of the organization’s achievements, especially when it is doing well. Under these circumstances the organization is unable to make disruptive changes preemptively, before events impose themselves upon it.

It can be done. In the case of Intel and its famous transformation from memories to microprocessors, the spark for the fire came from deep within the firm, where the resource-allocation process regularly restricted DRAM production in favor of the more profitable 80286 and 80386 chips. Far from formulating strategy, the role of senior management was to pay close attention, articulate what had already happened, and support the emerging direction and purpose. Other companies, like W.L. Gore & Associates, the makers of Gore-Tex fabrics, avoid products that threaten their innovative cultures by taking them too far into the zone of management processes and power. This latter, “Rolls-Royce” strategy would, of course, never have been a serious option for GM.

Without regular challenges to its supremacy and way of doing things, GM grew far into the upper right corner of the ecocycle where it became trapped in a dense web of constraints, many of which were of its own making. By the time the unfortunate Rick Wagoner assumed the top position in June 2000, it was far too late for any mortal to significantly alter GM’s fate, even with complete knowledge of the future. The power of the past was too strong, with the dead hand of Alfred Sloan, the formidable architect of the GM business model, still firmly on the tiller. The ancient Greeks would have understood the hero’s predicament perfectly and empathized deeply with his struggle against a cruel reality. Capitalism, on the other hand, like Nature itself, doesn’t care.

David Hurst is a speaker, consultant, and writer on management. His articles have been published in leading business publications such as the Harvard Business Review, the Financial Times, and Strategy+Business. He is the author of Crisis & Renewal: Meeting the Challenge of Organizational Change (Harvard Business Press, 1995; paperback, 2002). He is an adjunct professor at the University of Regina’s Kenneth Levene Graduate School of Business and is on the faculty of the Center for Creative Leadership, as well as a contributing editor at strategy+business.