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The larger lesson for business? Adapt, or never launch at all. It's a lesson from nature, which is the guiding principle behind The New Pioneers. The idea isn't quite "survival of the fittest": As applied to the jungle, Darwin's theory conjures up images of lions and tigers chasing after lunch. Wall Street Journal business columnist Thomas Petzinger offers an alternative take. He quotes biologist Brian Goodwin: "Competition has no special status in biological dynamics. What is important is the pattern of relationships that exist."
That's why big, fierce animals are more rare than ants and spiders. And that's also why monopolies are more rare than mom-and-pop businesses. Petzinger chronicles the stories of small and medium-size businesses in The New Pioneers, in industries ranging from banking to bookselling. In each of his examples, company leaders have adapted to new market conditions and not only survived, but thrived. They've done it, not by engaging their enemies in hand-to-hand combat, but by inventing ways around their obstacles to success. (Remember those ants?)
The consequence of this focus on adaptation over competition is Petzinger's astonishing conclusion that capitalism is merging with humanism. It's a premillennial evolution of the famous '80s declaration "Greed is good." So move over Gordon Gekko, and make room for Ben and Jerry.
Maria De La O
Creating Value in the Network Economy
Edited by Don Tapscott (Harvard Business School Press, $30)
An aggregation of essays on such topics as "disaggregation" and "virtual value chains" from Harvard Business Review.
The Digital Dialectic
Edited by Peter Lunenfeld (MIT Press, $35)
An "interdisciplinary jam session" of artists, scholars and entrepreneurs about our visual and intellectual cultures as the computer recodes technologies, media and art.
|Introduction: The Age of Adaptation||11|
|1||Being in Business: Trade and technology are fundamentally human||27|
|2||Everyone a Middleman: Why the new rules favor the small and connected||47|
|3||"Have It Your Way": The customer is the common denominator||76|
|4||What Am I Bid? A revolutionary economy demands radical pricing||103|
|5||From Planning to Playing: How agility and identity nurture innovation and trust||118|
|6||Nobody's as Smart as Everybody: Knowledge and self-organization flourish at the edge of chaos||146|
|7||All Together Now: How common purpose comes to life||179|
|8||Money and Motivation: Where people yearn to perform||198|
|9||At Home in the Economy: The reunion of family and work||216|
|10||"All My Sons": Will business save society?||239|
Chapter 1: Being in Business
Standing five feet tall in steel-toed boots, Charlene Pedrolie first entered the whitewashed cinder-block building in April 1995. This was the factory in which Rowe Furniture Company had been turning out sofas, love seats, and easy chairs in the Appalachian foothills of western Virginia for forty years.
Pedrolie was the plant's new manufacturing chief, and as unlikely as anyone you'd expect in such a job. She was pure Midwest -- St. Louis-bred, high school cheerleader, Washington University class of '83 -- suddenly thrown into a town where people still displayed Confederate flag decals in the rear windshields of their pickups. She was female in an industry where the bosses had always been men, and she was young, in her early thirties, on a management team some of whose members had worked at the plant for longer than she had been alive.
Though traded on the New York Stock Exchange, Rowe Furniture, to judge by this plant, was no exemplar of futuristic management. With its windows painted over to save on cooling costs, the factory housed about five hundred workers, most robotically repeating identical motions eight hours at a stretch. It was like something out of eighteenth-century France -- one person cutting, another sewing, another gluing; someone tucking, someone else stapling, others inspecting, labeling, and loading. Knocking out a simple piece of upholstered furniture spanned myriad dozens of steps, each executed to a drumbeat set in the front office. The pay was good by rural standards but the work was exquisitely boring: You punched your time card, turned off your brain, and performed exactly as the bosses required. "It was ad, and so on. And best of all, the marketing people promised delivery within a month.
To which the people in the factory had two words: Yeah. Right.
Creating a new, hyper-efficient assembly process was the job for which Rowe had turned to Pedrolie, who despite her youth and conspicuousness was shot through with self-assuredness. Growing up she had watched her mother and grandmother build a small bridal shop into a thriving tuxedo-rental chain. Trained in chemical engineering, she had managed a soap line for Lever Brothers and later a lighting plant for General Electric, a factory twice voted under her leadership as the best plant among twenty-six contenders in the GE Lighting Division.
But the most telling measure of Pedrolie's self-confidence was her awareness coming into the job -- not just her awareness, in fact, but her conviction -- that the answer to Rowe's problems would never come solely from her. Nor could it come from any leader alone. As she saw it, the answer resided mainly in the collective minds of the people actually doing the work. Nobody knew this kind of sewing, after all, better than the seamstresses themselves. Anyone who made his living gluing armrests on love seats knew more about that kind of gluing than just about anybody on the planet. Pedrolie also realized that each of these workers also knew more about the adjacent specialties than anyone except the people in those jobs. And although years on an assembly line had blinded them individually to the entire operation, the odds were pretty good that with the right information in their hands the people who had been doing it for so long were the best ones to figure out how to put the pieces together for greater speed and eff iciency.
So Pedrolie began dismantling. Most supervisory positions were eliminated. In fact, entire departments were eliminated. Everyone in the plant received a crash course in the skills he had previously seen at a distance: Gluers were taught to staple and staplers to glue; framers to upholster and upholsterers to frame. As a way of reinforcing the ideas that things were changing, Pedrolie ordered the paint scraped from the windows.
Before long the five hundred workers were assembling themselves into clusters -- "cells," Pedrolie called them. Each group selected its own members, like kids drawing sandlot teammates. Each group received responsibility for a particular line of product and began creating its own processes, schedules, and routines, all varying according to the mix of workers and products in each group. With the assembly line about to become a thing of the past, the teams figured out the most sensible arrangements for clustering their power tools, which were hung from the ceiling on electrical cords, color-coded by cell. "Every cell started with a blank sheet of paper," Pedrolie would recall. "They figured out the process from beginning to end." If anyone on the production floor wanted to explore making special arrangements with an outside vendor, that worker simply picked up the phone and made the call.
The teams did not conduct this work in a vacuum; there were engineers, administrative specialists, and Pedrolie herself pitching in throughout the process. But the managers acted mainly as backups -- as consultants, of a sort -- leaving the employees to develop the new system on their own. "They were inventing the process," Pedrolie says. "They would think through the intricacies of each step and map it out. Then we'd massage it together."
Finally the new structure was in place, and one Monday morning everyone arrived to find the factory as they had proposed to redesign it. After years of standing in a single spot and having the furniture come to them, the workers were suddenly walking from one partly assembled piece to another, feeling their way, bumping into each other, making mistakes. Production turned helter-skelter. Some people couldn't tolerate the ambiguity of their assignments and walked out without returning. Others who failed to make the adjustment were eventually let go.
For Pedrolie herself, it was a time of sweaty palms and sleepless nights. As the workers struggled to iron out the kinks in the system a surge in orders hit, throwing the factory even more deeply behind. Overtime ran into the stratosphere; tempers grew short; one worker had a nervous breakdown on the job. The naysayers in the corporate offices shook their heads and clucked their tongues. The college girl from GE, it seemed, was about to fall flat on her face. Sisson, the longtime general manager, looked on with dismay. "It was really touch and go," he would recall. "We really didn't know if it would work out or not."
More than a few factories, alas, get stuck at this point. People become so preoccupied with shifting blame they lose all interest in finding solutions. Workers who never wanted accountability say they won't be made the scapegoats and disengage further; managers who never wanted to give up control smugly say we told you so. The factory reverts to the old ways, or fails altogether. The pages of the business press, including my own newspaper, contain many accounts of such "failed experiments."
Had it been anyone else in charge of Rowe's effort, it, too, might have slipped into ignominy. But Pedrolie held firm. The assembly line was gone for good, she said; it could not be reinstalled. By refusing to let anyone out -- by forcing workers and managers to stay in the game and by cheering them on at every opportunity, which came naturally to her -- she forced everyone to realize that self-organization was the only path to a sane workday and a secure future. Instead of letting the plant fail, everyone began pitching in.
Even more important, Pedrolie had installed a "safety net," as she called it, and the safety net was information. Every member of every team at every moment had instant access to up-to-date information -- about order flows, order output, productivity, and quality. Data once closely guarded by top management became the common property of the shop floor. People had the instantaneous opportunity to see which of their actions worked and which didn't -- and they reacted! And adjusted! This wasn't as easy as I probably make it sound. Rowe still had computers locked in the hands of a few professionals who dallied over her requests to generate new reports and information. Using her sharpest political skills, she engineered the ouster of the firm's computer chief and brought in one of her pals from GE.
At Pedrolie's urging, people unaccustomed to talking with anyone other than the folks at the adjacent stations began coursing the four corners of the factory, chatting up anyone who might offer the glimmer of a solution to the problem of the moment. In time, representatives from each of the teams, acting entirely on their own, began holding impromptu meetings over the course of a shift to check on each other's progress. An informal process of give-and-take emerged between teams as well as within teams.
After several weeks of plant-wide pandemonium, the pieces at last fell into place, causing productivity and quality to shoot through the roof. Before long the factory was delivering custom-made goods to the consumer within thirty days; several months later the lead time had reached merely ten days, a stunning accomplishment in an industry accustomed to working on lead times of as long as six months. A culture of speed permeated the plant. When a technology specialist named Ken Potter wanted to install a state-of-the-art frame-cutting tool, he was stunned to win management's instant approval. "It's exciting to feel like you're on the cutting edge," he said as the new computer-controlled machine buzzed behind him. "In the past we were told to wait until someone else in the industry got one."
Best of all, the sense of personal control -- "this is my job and I'll figure out how to do it" -- bred a culture of innovation in every corner of the plant. A group came together to form a "down-pillow task force" to invent a better stuffing process. (The workers could easily absent themselves from their regular jobs because cross-training had created so much bench strength behind every position.) A group of workers increased the capacity of the drying kilns by feeding in sawdust as a fuel; as the efficiency of the kilns grew they began selling the excess drying capacity to outside lumber treaters through their own marketing program, creating an altogether new business (with an 80 percent profit margin).
The Rowe Furniture turnaround is meaningful on many levels. It dramat izes the range of initiative that people display when freed to do their best work. It reveals the creative power of human interaction. It suggests that efficiency is intrinsic; that people are naturally productive; that when inspired with vision, equipped with the right tools, and guided by information about their own performance, people will build on each other's actions to a more efficient result than any single brain could design. In fact it's rather like saying that being good in business calls on being good at being human.
The history of business won't tell us much about the future, but it certainly reveals why business was born and why it has persisted so long. These are facts we're wise to consider in choosing what we expect of business today and what we hope of it tomorrow.
"The market is not an invention of capitalism," Mikhail Gorbachev once told the Wall Street Journal. "It is an invention of civilization." He could have gone further: Civilization is an invention of business, and business is an invention of life. Business consists of technology and trade, both of which predate our species. Homo erectus mined quarries for stone tools as many as 1.4 million years ago. Language itself may be a by-product of technology: Some researchers believe toolmaking helped to create the neural connections necessary for speech. Trade in ax parts dates at least to 200,000 B.C., long before humans left Africa for Europe and Asia.
Our economic identity is stamped all over our language and culture. The earliest known examples of cuneiform writing involved business transactions almost exclusively -- ledgers and inventories accounting for everything from livestock to olive oil. In many ancient languages the word equivalent of "business" shares the same roots as "life"; in old Sanskrit, "man" was derived from a word meaning to weigh, value, count out, or share. The words "commerce" and "market," (as well as the French merci, for gratitude) share their origins in Mercury, the god of trade and information.
Trade predates agriculture, government, religion, art, law, and symbolic communication, indeed every organizing social force except the family. Why should this be so? The answer is evolution. Samuel Butler once remarked that a chicken was an egg's way of making another egg. No differently do genes program every living thing to strive for efficiency, because efficiency, after all, allows genes to live on. With sufficient information, any living thing will find the shortest distance to food, which makes the food go further; those who succeed bear more progeny with the same traits. "Evolution," as one of Darwin's biographers wrote, "thus blindly follows the route of maximum resources use." To put it another way, efficiency is evolution in action. Whether we are born free, born to be wild, born in the U.S.A., or born to lose, we are all, as living things, born to economize.
Nobody has thought more deeply about the origins of business than William C. Frederick, who did his Ph.D. work in both anthropology and economics. Frederick served as dean of the University of Pittsburgh business school, studied business systems across Europe in nearly a decade of work with the Ford Foundation, and became one of the world's leading authorities on business ethics. His decades of research ultimately persuaded him that all living things harbor an impulse to economize as a bulwark against the universal propensity toward the loss of energy and form, a force called entropy. "This economizing process is the only way to survive, grow, develop, and flourish," he wrote in a landmark 1995 study. "Overall, life on earth has been a roaring economizing success story." In the case of us humans, business is the tool we use to lighten our loads, "the main economizing vehicle on which organized human life depends," Frederick says. The corporation thus is "as Darwinian as a frog."
Once evolution created the impulse to economize, there was nothing to stop it. We economize through the division of labor (because people vary in their skills) and the exchange of resources (because regions vary as well). Add those together and you get technology, the specialized artifacts of business; widen the boundaries of contact and you get trade; throw it all together and you get economic progress from nothing more than the clump of rock, the tub of water, and the daily dose of sunlight that compose the planet earth.
There is a word that describes how life creates unlimited possibilities from such finite resources, a term, though rooted in nineteenth-century biology, that is getting some use in economics today. The word is "emergence." When systems become sufficiently complex and interconnected, the interaction self-assembles into a new, higher order: molecules into cells, cells into organs, organs into organisms, organisms into societies. This is economizing, life creating more from less, something from nothing -- "order for free," as the molecular biologist Stuart Kauffman puts it. At each level emergence creates more than the sum of its parts, as in one plus one equals three. The strength of an alloy may exceed the combined strength of the metals that compose it. A jazz ensemble creates a sound that no one could imagine by listening to the instruments individually.
Emergence creates new qualities as well as greater quantities: What appears chaotic at one level (the undirected motions of furniture workers, the bustle of a million computer users) may generate stunningly ordered behavior at the next level (a more efficient factory, a new medium called the Internet). The science writer James Gleick, whose 1987 book Chaos helped inspire the popularization of so-called complexity theory, described it this way: "Simple systems give rise to complex behaviors. Complex systems give rise to simple behavior. And most important, the laws of complexity hold universally, caring not at all for the details of a system's constituent atoms."
Although Newtonianism long blinded people to the idea, economizing is pure emergence. Some business leaders began realizing this in the 1970s when they began using the word "synergy" (a term taken from anthropology) to describe the corporate equivalent of one-plus-one-equals-three. Says the biologist Tyler Volk of New York University, "Very little of importance is ever just the sum of its parts, except money."
Before returning to the real world it's worth acknowledging two deep laws about economizing.
The first is that economizing occurs through learning and that every living thing, at bottom, learns in the identical way: through the elegantly simple and constantly recurring process of action, feedback, and synthesis. Feedback exists in every system, since "a system," to quote the science writer Kevin Kelly, "is anything that talks to itself." Feedback is information t hat constantly travels the same route (hence, "feedback loop") but never exactly repeats itself because it changes the thing that produces it. When feedback persists in regular waves it magnifies -- feeds on itself, so to speak -- ultimately running out of control: the familiar screech that Jimi Hendrix created by waving his guitar pickups in front of his speakers. Most living systems, however, such as jungles and stock markets, maintain a rough balance thanks to negative feedback, which dampens changes instead of magnifying them.
When feedback causes a living thing to change behavior, that's learning, whether a bacterium gravitating toward a sugar gradient or a child reckoning blocks. Learning, it's true, is full of spectacular nuance and complexity, but there's no getting away from that feedback cycle of action, reaction, and synthesis, not on any scale of life. Human creativity, says the Nobel chemistry laureate Ilya Prigogine, is "part of a fundamental trend present at all levels of nature." Or, as Stuart Kauffman quips, "We may find that E. coli and IBM do indeed know their worlds in much the same way."
I know a business consultant named Fritz Dressler, who during the Cold War conducted psychological profiles of foreign leaders for the State Department. He also immersed himself in the 1950s fighter-pilot studies that identified the fabled OODA cycle -- observe, orient, do, act. In later years Dressler conducted a full-time investigation of every well-established theory of human knowledge -- such familiar and unfamiliar theories as the "cognitive cycle," the Delphi Process, and on and on. Every one of them, Dressler realized, was stricken through with the identical arrow: the cycle of action, feedback, and synthesis. "The process we call creativity is in fact nature's evolutionary process running in real time," Dressler says. It is "evolution on the fly."
The second deep law about economizing is that it occurs best in groups. A solitary inventor laboring in his lab is every bit as important to human development as the solitary mutation is to the evolution of a bacterium, but in either case it takes a village (so to speak) to propagate the outcome. When nutrients run low, certain bacteria self-organize into slime molds that consume less than the bugs would otherwise. African termites, who are nearly blind and quite stupid individually, create ventilated structures fifteen feet high, full of chambers, overpasses, ventilation tunnels, and fungus gardens -- ten-ton masterpieces that may stand for more than three hundred years -- without ever consulting a set of plans.
Self-organization is a universal property of life, creating order in everything from zebra stripes to human brains. Dee Hock, then a bank executive in Seattle, laid out the basic elements of the global VISA credit-card system in 1970 -- then watched the network emerge all by itself, with no planning or control at the center. "The organization had to be based on biological concepts to evolve -- in effect, to invent and organize itself," he explained. This should come as no surprise, Hock has often said, since any living system organized around a valid purpose will find its way to an efficient result. "Who is the president of your immune system?" Hock once asked me. "Where is the CEO of the jungle?" We know the capacity to self-organize is inborn in humans because it is a skill we display when forced to act on instin ct: during an emergency, as when rivers overflow or hurricanes approach.
Humans, let's admit, differ from termites (and corporations from termite mounds) in quite a few ways, but in only two that need concern us here: in the speed and range at which they apply the laws of economizing. Cells may spend millions of generations evolving a more efficient trait, but organisms with neurons can learn on the spot. And with the onslaught of real-time communication, each human brain becomes like a single cell in a huge social brain -- a "team mind," as Fritz Dressler calls it -- which itself is evolving.
The other big difference: A cell acts within a very small environment; humans, by contrast, have evolved eyesight, language, money, telegraphs, modems, and wireless pagers, all for taking soundings from a wide environment (locating the nearest mammoth herd, or receiving stock quotes from the floor of the Big Board) and, in turn, for causing change over that vast expanse (attacking the mammoths, selling IBM). Somewhere between mammoth hunting and real-time stock trading our bodies quit adapting to the environment because our minds created technologies through which we could adapt instead. Everything evolves, including the nature of evolution itself.
But each advance in our economizing takes us one step beyond our ability to regulate its diseconomizing effects. We attain astonishing new efficiencies by forming tribes and inventing spears until one day there are no mammoths left to breed new ones. Japan creates sleek "just-in-time" supply chains to eliminate factory inventories, only to substitute them with an armada of trucks that clog the highways and pollute the air. We create amazingly clean, eff icient, and inexpensive electricity from uranium until -- darn! -- we remember to account for nuclear disposal, and the cost increases a thousandfold. Employers and insurance companies create bureaucracies to control medical costs only to find that the bureaucracy engulfs the entire system, driving costs higher. Through the growing use of systems thinking, scientists came to recognize that "we can never do merely one thing," as one commentator noted in the 1960s. "Wishing to kill insects, we may put an end to the singing of birds."
Though it sometimes works slowly, reason invariably breaks through these blinders and discovers the unintended effects of our actions, since every new advance in human understanding at some point widens the boundaries in which we can see our systems operating. To the extent that business remains blind to the damage caused by economizing, it ought to be forgiven. To the extent it ignores or shifts harm to someone else -- by exporting deplorable working conditions, for instance, or by knowingly pushing the cost of toxic accumulation into future generations -- then we are acting unethically. "Business can provide meaning for workers and customers," says the author and entrepreneur Paul Hawken, "but not until it understands that the trust it undertakes and the growth it assumes are part of a larger covenant."
Growing up near a factory called Lordstown, I could see the effects on the workplace itself of business's resistance to that covenant. The Lordstown plant, in Lordstown, Ohio, is a fabled General Motors factory a few miles from the gritty old steel town of Youngstown. I remember touring the plant as a grade-school student when it opened in 1966. Stretching one mile, the tour guide said, it ranked among the biggest factories in the world; you could clock it yourself on the odometer of your GM car. Staffing the plant with returning Vietnam veterans, Lordstown established the high-water mark in the trade-off between mindless work and high pay. Job specialization was so extreme and individual duties so rote that some people could do them half-asleep -- or drunk, or high. For when the whistle sounded for a lunch break you could see people sprinting across the expanse of plant and parking lot to their cars, peeling away to one of the liquor stores or taverns outside the plant gate, guzzling beer and inhaling joints every minute of the return trip, the buzz taking hold just as the assembly line shuddered back into motion.
This was economizing, 1970s-style -- and it was economical if all you measured was how many Chevy Novas rolled out by the hour. But the economics were not so good once General Motors began widening the boundaries of the analysis -- the warranty expense of all those defects, the alienation of loyal customers, the cost of absenteeism, medical benefits, turnover, family strife, theft, union militancy, and government regulation. Lordstown was a monument to the Newtonian fallacy that input equals output, that if a big plant was good then a bigger plant was better. In the giantism of the postwar era, institutions of all kinds outgrew their ability to control their own complexity -- from GM to IBM, from a social system in the Deep South to a campus in Berkeley, from Nixon's White House to Brezhnev's Kremlin.
Why? Because they were not paying attention to the feedback in their systems. They dismissed it as a false signal. They could no longer hear the effects of their own actions -- and nothing long survives without listening to its own effects and answering back with change.
The first person to recognize this in the corporate world -- and whose actions would ultimately save Western industry from itself -- was a rather curmudgeonly physicist named W. Edwards Deming, who, while not exactly a household name, has become a demigod to leaders of the product-quality movement. Deming grew up in Wyoming surrounded by farming, a vocation that demands the long view and in which everything is connected to everything. Deming, to quote one of his biographers, "also possessed a deeply religious belief in human potential." In his work as an industrial statistician Deming could see that even infinitesimal variations tend to compound in large mechanical systems. Unlike a living system, with its dynamic balance of positive and negative feedback, an unregulated mechanical system experiences variations that produce larger variations in the same direction, eliminating consistency and ultimately causing failure. The solution, Deming found, was tracking not just the output of a machine but also its tiny variations in performance, and the variations between machines, and variations across entire factories, and making constant adjustments accordingly. Deming had discovered nothing other than a new application for the timeless idea of action, feedback, synthesis -- evolution itself brought to the factory floor.
These practices came to be called "quality control," and they helped an unskilled and hastily assembled Allied workforce turn out better weapons in World War II. But in peacetime, when Deming approached the chieftains of corporate America to sug gest that their mighty and victorious operations could continue to benefit from his ideas, he was laughed out of every boardroom he entered. So Deming looked for receptive ears elsewhere. He found them in Japan.
Japan was not only eager to rebuild its crushed economy, it was also more attuned than the West to nonlinear thinking -- the principle holding that systems do not always behave in smooth, continuous, or perfectly predictable ways. Deming became a powerful force at many Japanese companies -- no-name outfits like Toyota, Mitsubishi, and Matsushita, for instance -- helping them to turn the once-derided phrase "Made in Japan" into a synonym for quality and efficiency. He expanded the concept of tracking machine feedback by listening not just to the machines but to the workers operating those machines, and not only listening to those workers but allowing them to take corrective action of their own accord; experience, after all, creates tacit knowledge that no one can articulate. Deming did not stop there. He counseled his Japanese clients to listen also to the customers purchasing the worker's products, and ultimately to the entire economic society in which those customers operated -- in short, to widen the boundaries by which managers studied the effects of their economizing. He told the Japanese that instead of locking into a theoretic optimum they should allow evolution to persist, a concept the Japanese called kaizen, meaning "continuous improvement." Although Japan created a number of the world's biggest corporations thanks in large part to Deming's aid, their size was the result of their success, not its cause.
Once Japan had cleaned the Newtonian clocks of American indust ry, Deming's ideas began taking hold in the West, but with a difference. In the U.S. and Europe a bustling industry of consultants packaged his methods into user-friendly "programs" and "methodologies" with names like Quality Circles, Total Quality Management, and "empowerment." These initiatives often brought about significant improvements, but managers invariably cut short the progress when they realized they could not simply put the program in place and walk away. They failed to realize that adaptation is a way of living -- better yet, a way of changing -- that never stops. While many managers abandoned Deming's ideas in the 1980s in search of the next fad, some continued practicing them into the 1990s. Those that did so were rewarded with a leadership sensibility that harmonized with the radical changes sweeping the business world -- intense and unpredictable competition, fast-changing technology, and a newly diverse and demanding workforce. Even many automotive industry managers benefited from their persistent if unfashionable embrace of Deming's concepts. One such manager was Mark Schmink.
By the summer of 1997 Schmink had spent more than twenty years with a Toledo-based company called Dana Corporation -- not exactly a small company at nearly $7 billion a year in sales, but a flyspeck by the standards of the auto industry. Dana made big, heavy parts for the Big Three automakers -- axles, brakes, chassis, and other contraptions full of welding. A lanky, white-haired, and soft-spoken engineer of forty-eight, Schmink had spent much of his time with Dana studying management methods in Japan.
In 1993 Dana awarded Schmink an extraordinary assignment: building, then operating, a factory in Stockt on, California, to make a single product for a single customer: truck undercarriages for Toyota. By then the biggest auto company on earth, Toyota would ship unassembled steel parts -- more than 130 different beams, braces, corners, caps, and the like for each chassis -- all the way from Japan to the Dana plant in Stockton. There, Dana would put the pieces together and dispatch them on a continuous truck convoy to a Toyota plant sixty-three miles away. As Toyota's truck-production schedules changed, so would Dana's, instantaneously, through a real-time computer link.
But this was the stunning part: Dana agreed to provide Toyota a price cut once a year beginning in 1997. Not an inflation-adjusted price cut but an actual, hard-dollar price cut, a promise that left the chassis plant with no choice but to economize relentlessly and never let up.
This was a truly startling concession on Dana's part. The plant was designed for staggering efficiency to begin with -- not with any uniformity of methods, as favored in the Industrial Age, but with a diversity of them. For instance Toyota had long favored the quality and consistency of robotic welders, while Dana strongly favored the nuance and intuitive "feel" that human welders possess. So this particular plant was built as a hybrid, with a dozen robots, like twitchy spider legs, applying long welds to the sides of each chassis. Then a half-dozen human welders took over, snapping down their masks in unison, closing in on all sides and applying dozens of spot welds, turning the air ablaze with crackling blue sparks.
Just as vexing, Dana knew it could never finance the price cuts by reducing the wages it paid to its workers; on the contrary, reduci ng wages is almost always a poor choice when the objective is economizing. Neither could Dana finance the price cut by substituting cheaper raw materials, because Toyota was providing all of those. The only way Dana could fulfill its commitment was to find ways of improving on its assembly process -- and then find ways of improving on the improvements, without end. "You can only work and sweat so much; it's finite," Schmink told me. "That leaves you with finding better ways to do things. To my knowledge, that's not finite at all."
Schmink began by choosing welders with zero experience, reasoning that unconditioned hands would be freer to explore new ways of welding. He insisted that everyone learn every job in the plant so people knew how each task fit into the whole, and that no one lodge himself in a permanent assignment, thereby maintaining a supply of fresh perspectives. Schmink had no choice but to engage the complete intellectual involvement of every man and woman in the plant. It was as if Schmink were trying to undo nearly a century of Frederick Taylor's job specialization -- "you are not paid to think" -- in a single stroke.
The Stockton area -- largely agricultural, though drawing more industry all the time -- is an ethnic melting pot, which both facilitated and complicated Schmink's efforts. In the interests of generating a constant stream of new ideas he wanted the greatest diversity of backgrounds possible, and he got it, with nineteen different nationalities represented among the first three hundred people he hired. But the Stockton community was also riven with ethnic conflict and occasional outbursts of violence, and there was no way to keep these tensions from breaching the plan t gate. At one point, through a sheer administrative error, the company newsletter neglected to print a notice about an employee-organized Cinco de Mayo celebration. An Hispanic group felt deeply slighted -- disaffection that the economic mission of the plant could ill afford. Schmink called a plant-wide meeting to explain the benign circumstances of the oversight and to apologize, preventing the hot feelings from boiling over.
Schmink created a plant library stocked not only with research materials but bestsellers on tape to get people's minds moving in their cars on the way to work. He fostered the culture of continuous improvement by telling stories of his upbringing as the son of a Methodist minister: "The churchgoer does not become a truly devoted and learned Christian his first Sunday in a pew," he told the plant at one point. "His dedication to his religion grows as he learns more and as he practices those new beliefs." Worker teams met regularly to question every routine of the plant, right down to the sequencing of individual welds.
Schmink also required that every employee submit two productivity ideas in writing each month, an organized attempt to foster and capture feedback from the people closest to the process. Many of the suggestions involved working conditions -- smoke control, better ergonomics, break schedules -- none of which would seem immediately to benefit the productivity of the plant, except that by taking the widest view possible Schmink recognized that the effect of the work on people's minds and bodies deeply influenced how they performed that work. In 1996 alone, with the first annual price cut approaching at year-end, a maintenance apprentice named Matt Johnson came up with 180 ideas -- the installation of an electronic eye to assist in placing a cross-member, for instance, and the purchase of backup welding guns -- thanks partly to his having worked in so many different assignments. "After moving all over," he said, "I could see problems up and down the line." As time passed, ideas begat ideas. As welder Ray Smith explained it, "I have my impact on somebody else's impact on somebody else's impact" -- as clear an expression of systems thinking you'll ever hear.
While hungrily gobbling up the ideas, Schmink sent feedback in the other direction as well. Personally responding to every written suggestion (his most time-consuming duty) was itself an act of positive feedback that motivated even more ideas to come in. He reported minute-by-minute productivity figures on electronic displays that looked like gymnasium scoreboards. He celebrated the conquest of every milestone with an event -- a rib eye lunch, a family barbecue, a day of free sodas, anything to sustain the conviction that even small improvements were vital.
Finally, at the beginning of 1997, Dana cut Toyota's price 0.84 percent -- a meaningful step, though well short of its 2 percent target. "Our vision is not a reality yet," Schmink acknowledged when I visited. His candor was admirable, but there was no disputing that such incremental changes, when taken together, were beginning to have a national economic effect. For it was in the late 1990s that the major automotive companies, thanks almost entirely to the elevated role of feedback in their affairs, provoked a new kind of sticker shock: the first price reductions that most auto buyers had seen in their lifetimes, the dividend paid by economizing.< P>
Every act of economizing involves some combination of five ingredients -- labor, energy, material, space, and time; information can substitute or even eliminate much of each. The economist Brian Arthur observed that the old economy was based on materials (lumber, for instance) held together with information (blueprints), while the new economy is based on information (lines of computer code) held together by material (a floppy disk). Until recently Sprint equipped each of two thousand installers with 125 pounds of maps and other documents. Now the installers carry the same information in a two-pound computer provided by a small Florida company called Wave Corporation.
But where does information come from? Consider the lowly binary, nothing but a pair of anything. A binary is the simplest form of complexity. The most complex technology known to the mind -- consciousness itself -- is reducible to nothing more complex than two states, a few billion neurons alternating between charged and discharged. (Talk about emergence!) Those neurons themselves are the products of binary devices called genes, which function no differently than so many tiny toggle switches. Now, our computers operate the identical principle of on and off, yes and no, 1 and 0. "Technology's taproot," says William Frederick of Pitt, "extends far down into genetic systems of very ancient lineage."
The economizing power of information is accelerating through additional trends, each compounding the others. First, we now have more information about information, applications that can help researchers sort through billions of organic molecules in the search of new drugs, for instance, or that help businesspeople sort through millions of files in the search for new customers. Second, and more important, we have distributed this heightened computing power to vastly more people -- more brains connected to more ever-more-powerful tools, each in pursuit of a more productive and pleasurable way of living (a network, as Marshall McLuhan forecast in 1962, that would become the global equivalent of the human nervous system.)
Third, and most important of all, the number and diversity of these information-handling tools is multiplying because people can invent them, produce them, and in some cases even distribute them acting as organizations of one. Software development, the fastest growing industry in the world, is also among the most democratic. The only barrier to entry is the creativity of the mind. There are no economies of scale in software development -- in fact, software development suffers from reverse economies of scale, which is why big projects are typically broken down into teams of about seven to a dozen. Microsoft's size confers advantage only because it is mainly a marketing company that happens to produce software (much of it simply acquired from small companies.) These days a kid in a dorm room can invent a technology so powerful it makes Bill Gates shiver, as occurred when Mark Andreessen of the University of Illinois created the Web browser that ultimately became Netscape Communications Corporation.
Because anyone can now create a powerful economizing tool, we have more people applying more different ideas and making more progress, as I learned during a snowy winter weekend in Idaho Falls with an entrepreneur named Gary Schneider.
Schneider grew up around cultivation as well as contraption, the grandson o f a farmer and the son of a union railroader. Coming out of high school he followed his father into railroading until he had shoveled enough rock under enough track to realize he could never spend his life doing it. He enrolled in the University of Arizona, where he studied agriculture as well as operations research, the science by which major organizations used high-tech tools to utilize resources more efficiently. It was a combination of which he would make profitable use.
At the time, major agribusiness companies used mainframe computers to help in their planting strategies, but there was nothing like that for the family farm. In a class on entrepreneurship Schneider wrote a business plan around an imaginary software tool by which farmers could analyze crop prices and growing costs. Working on the assignment convinced Schneider that driving the guesswork out of field planning and crop selection could revolutionize farming, vastly reducing the use of seed, fuel, fertilizer, and human labor while increasing profits. But the year was 1986 and the personal computer had just come on the scene. It lacked both the power and the ease of use to put such power at the fingertips of farmers. Schneider could only dream about the potential of his tool, and get on with the rest of his life.
Before long he wound up on a government scholarship in graduate school at Massachusetts Institute of Technology, the citadel of "systems thinking." He was electrified studying the laws and properties of interconnectedness, a way of thinking that helped him see the connections among agriculture, engineering, entrepreneurialism, and government policy. (He also noticed that some of the challenging concepts in systems thinki ng came more easily to students with backgrounds in engineering or biology -- integrative disciplines, after all -- and less easily to those more practiced at taking things apart, such as the finance and accounting students.) Systems thinking also gave Schneider new insights into the design, use, and commercialization of the farming tool of which he was still dreaming. Before long he again threw himself into the project, but it was the early 1990s, and desktop power was still insufficient to crunch the kind of numbers Schneider had in mind. He also owed the U.S. government a three-year tour of duty in exchange for its having underwritten his master's degree. He sustained his interest in agriculture by taking an Energy Department job in the farm state of Idaho, where, upon discharging his obligations to the government, he left to form a new company called AgDecisions Research.
By that time he had been living with his dream for a decade, during which he not only continued upgrading the algorithms in his program but also revived his old undergraduate business plan. With $100,000 in venture capital and the help of his wife, Maudi Gomez, and a single programmer named Blake Schwendiman, he had the product within a year. He shipped the code to a husband-and-wife company that copied the program onto CD-ROMs, produced the printed materials, and shrink-wrapped the whole thing for sale to small farms.
Ultimately, farm equipment dealers began acquiring rights to the program so they could help customers plan their plantings. I remarked to him that after ten years, his old jalopy had at last become a hot rod. Betraying just a trace of offense, he answered, "I tend to think of it as a bean seed, just below the surface -- dormant, although inside the seed there's biological development. Once the seed sprouts, it takes off fast."
Again and again, when I bore deeply into the affairs of an interesting and effective entrepreneur or organization, particularly into the use of technology, a link to the natural order of life begins to reveal itself.
In Cambridge, Massachusetts, for instance, I spent some time at a robotics company called Intelligent Automation Systems, whose founder, Steve Gordon, began his career at the intersection of biology and mechanics, as a prostheses engineer. Frustrated at his inability to match the perfection of nature's designs, he switched into manufacturing, specializing in "machine vision" -- systems that allow robots to watch what they are doing and to make instant adjustments, almost like Deming's quality control conducted in real time. At the time of my visit in late 1997 Gordon and his team were building a machine that a major sportswear manufacturer hoped to use for repatriating manufacturing from the sewing sweatshops of Asia. Even though people there worked for pennies an hour, Gordon's machine would make them uneconomical. Gordon's reputation as a machine builder also drew him back into biology, designing machines to synthesize the raw material of tomorrow: DNA, the information of life.
Genetics also lurked in the background when I showed up at a factory in Moline, Illinois, where Deere & Company assembled farm equipment. The problem afflicting the plant was similar to the one that Charlene Pedrolie had inherited at Rowe Furniture: The marketing department was offering customers the opportunity to order custom-made equipment, causing havoc on the assembly line. Dee re's schedulers had spent months trying to optimize the sequence of the orders so that the line would run smoothly, but to no avail.
Deere turned over the problem to a staff analyst named Bill Fulkerson, a slightly rumpled, bespectacled grandfather and former math professor who had spent several years toiling anonymously on technical issues. Fulkerson found out about computer programs called "genetic algorithms," which could randomly "breed" schedules, comparing one against another and keeping the better of two, on and on through millions of iterations -- a system inspired explicitly by the feedback loop of genetic natural selection. Operating overnight on a desktop PC, Deere's genetic algorithms turned the Deere factory into a model of industrial economizing -- truck trailers delivering parts precisely when needed; self-organizing worker teams building custom equipment, no two alike; each product rolling off the end of the assembly line into an idling truck awaiting the delivery of precisely that machine for Farmer Jones. Notably, Deere began referring to the Moline facility as a "living factory."
Perhaps most amazing, the greatest leaps are yet to come. "Technologies are feeding back on themselves; we're taking off," says Danny Hillis, the founder of Thinking Machines Corporation. "We're at that point analogous to when single-cell organisms were turning into multicelled organisms." It is to this labyrinth of ever richer and more robust connections that we now turn.
Copyright © 1999 by Thomas Petzinger, Jr.
Introduction: The Age of Adaptation
Lehigh Avenue in Philadelphia could be the main drag of inner-city America. Listless vagrants have the look of drugs in their eyes. Graffiti is painted over graffiti, layered like epochs of urban archaeology. Street-corner vendors display porno alongside the morning papers. Clouds of truck exhaust waft over the avenue. It was here, waiting for a crossing light to change on a bracing late-winter morning in 1995, that I awoke to the existence of an altogether new economy in America.
A giant city bus slowly roared away from the stop across the street, revealing a tiny storefront called Philadelphia Pharmacy. Walking through the door was like entering another world. The store employees radiated hospitality. The narrow aisles were jumping with customers -- schoolgirls endlessly studying the makeup choices, mothers selecting household staples, old people filling Medicaid prescriptions -- while the unstinting attention of the staff kept the crowd gliding easily through the store. Mostly Hispanic and African-American, mostly unmarried mothers, everyone working in this buoyant place, I soon learned, came from the depressing neighborhood surrounding it.
Everyone, that is, except the owner and head pharmacist, Richard Ost, standing behind the prescription counter in the team jacket of a suburban grade-school hockey team, "a white boy from northeast Philadelphia," as he described himself.
Like so many of his generation he had started out in corporate America, joining Thrift Drug following his graduation from pharmacy school. Almost immediately he was fed up with the frustration and sheer waste of corporate bureaucracy and politics. "Iwee, caring about his customers, and adapting his technology, Ost's business positively exploded. Before long, he expanded into the rehabilitated remains of a torched-out auto parts store, adding a few aisles of general household merchandise. The display space was limited, but employees constantly restocked the shelves, going through half a truckload of merchandise a week. Staffing this expansion was not easy. When Ost found a reliable, committed employee -- usually a woman, usually a mother -- he locked in her loyalty with family medical benefits, almost unheard of among inner-city employers. He added profit sharing, giving his employees a stake in the sale of every item and the control of every expenditure. He conducted a fortnightly staff meeting to share up-to-the-minute financial results so employees could follow the outcome of their combined actions and figure out where they needed to improve. When a Vietnamese influx swept the Lehigh Avenue area Ost added a third language to his labeling system, as in "Uong ngay 2 lan, moi lan 1 vien."
As success begat success Ost could no longer handle the merchandising, ordering, and scheduling alone, so he trained his employees to handle all that themselves. He sent them to merchandising conferences; for some it was their first trip out of town. He issued them business cards so repeat customers could ask for an employee by name rather than language fluency. In the rush of closing time Ost would turn to his janitor and ask, "What do you want me to do?"
Ost's actions soon put him on good terms with the community's leadership as well as its rank and file. He became the first Anglo chosen as Hispanic citizen of the year, bringing priceless rec ognition to Philadelphia Pharmacy. When the nearby Episcopal Hospital needed someone to take over the gift shop and pharmacy concession, it turned to him, giving Ost yet another small location with high volume. Employees at his hospital store distributed a complimentary Spanish-language television guide in the patient wards upstairs with advertisements promoting the specials at his other neighborhood pharmacies. He priced his TastyKakes in the hospital store to return the correct change from a dollar bill for a cup of coffee from the vending machine. It reduced his profit margin a bit, but his snack shelf turned over eight times a day.
By the time of my visit, from his three tiny locations, Ost was doing $5 million worth of business a year -- four times more business, square foot by square foot, than the average American drugstore. His prescription volume had grown so large (and his payment record so impeccable) that he began receiving discounts from Merck and other major suppliers on a par with the prices paid by national chains.
From a flagship location spanning less than one thousand square feet, Richard Ost succeeded in his challenging surroundings because he responded smoothly to everything that surrounded him. He did not contrive his way to success; there isn't a five-year plan in the world that would have identified the variety of opportunities Ost created on the fly. He grew his business not by planning but by adapting, not with business-school knowledge but with real-life experience. His employment policies, his use of technology, and even his pricing wove his business into the fabric of the surrounding community. He leaped to an even more stunning level of success because he used that community as a medium through which to unite the interests of employees, customers, civic leaders, and pharmaceutical companies alike.
Ost's celebrity eventually drew the attention of the pharmaceutical giant AmGen, which hired him to share his success secrets in a video intended for distribution to ten thousand drugstores nationwide. Soon he was traveling coast-to-coast, helping druggists get closer to their employees and customers alike. Three years following my visit to Philadelphia Pharmacy, Ost the consultant was having more impact than Ost the pharmacist. So he sold his three little pharmacies to Rite-Aid.
It was, as they say, an offer he couldn't refuse. Wall Street was in the midst of a spectacular bull market, and the pressure to sustain year upon year of earnings growth was causing big companies to pay top dollar for innovative smaller businesses. Moreover the pharmacy business was becoming a commodity business, and Ost was happy to let the big retailers slug it out over ever-shrinking margins. And although it was melancholy to see the logo of a national chain hoisted over Ost's shops, he knew he was leaving behind a better neighborhood. After closing on his sale, Ost gave his former employees nearly a quarter-million dollars in bonuses and other payments. Many of them received promotion opportunities in the big chain that Ost himself could never have provided.
From day one in business, Ost knew he was part of something bigger than himself. Like an organism in its environment, he allowed his business to change with the community and simultaneously to cause change in the community; he, and everyone around him, benefited by his doing so. Flush with the proceeds of his sale, he began pl otting his next move as an entrepreneur.
I learned something important the morning I first entered Philadelphia Pharmacy. I had spent nearly twenty years analyzing business for the Wall Street Journal. I had covered some of the biggest takeovers, labor strikes, bankruptcies, and bust-ups in history. I had interviewed CEOs in penthouse suites and coal miners half a mile underground. I had supervised the Journal's economics coverage from Washington and had written two books about major industries, oil and airlines. But driving away from Lehigh Avenue I realized that my career had been devoted almost entirely to the study of conflict. I had written about people and institutions locked in struggle not over the creation of wealth but over its control. After devoting exactly half my lifetime to writing about business, I knew little about how business actually worked.
A short time later I launched a new weekly column called "The Front Lines." Instead of rounding up the usual sources and subjects -- the officers and analysts who mostly did a lot of officiating and analyzing -- I resolved to write about the anonymous people who actually invented the products, sold them to customers, and came face-to-face with competitors. And with each successful person I came across it grew obvious that a revolution was under way in business, for the most part invisible in the headlines and the boardrooms, but dizzying in its effects on the front lines.
Factories, I once thought, were supposed to run with clocklike precision. Then I met Charlene Pedrolie, who managed a cinder-block furniture plant in rural Virginia. Pedrolie had ripped out the assembly line, setting gluers, staplers, and seams tresses madly scurrying to assemble sofas as they saw fit. Amid the pandemonium of the shop floor, productivity and quality were going through the roof.
Products, I always believed, were priced according to cost, with a margin for profit. Then I met Paul Graziani in King of Prussia, Pennsylvania. He was selling a disk of software called the Satellite Tool Kit, a product he developed while working as a General Electric engineer. GE sold the Satellite Tool Kit for $3 million a copy. When I first met him in 1995, Graziani was happily selling the same thing for $9,999. When I visited him again in 1997, the price had dropped to zero -- yet by redefining his market his company was making more money than ever.
I used to think that only managers could make the hard decisions. Then I went to Mercedes-Benz Credit Corporation in Norwalk, Connecticut. There, employees were busily investigating ways to eliminate their own jobs. Why? Because those who succeeded were rewarded with new jobs helping the company to grow.
At one time I believed that going into business required a ransom of risk capital. Then I met a debt-ridden artist in Minneapolis who went from homelessness to a Horatio Alger story by selling lettertype designs over the World Wide Web.
Corporate America, in my experience, was fearful of regulators and wary of local activists. Then I discovered how a plant manager for DuPont had dissolved the boundary between factory and community while causing profitability to soar.
I always believed that major corporations jealously tracked every dollar, guarded every asset, and tracked the actions of every employee. Then I visited the family-owned Koch Industries of Wichita, Kansas, which had grown bigge r than Boeing, Intel, or Motorola with no budgets, no central planning, and no job descriptions.
Pundits have been writing for years about a revolution in business, of course. Yet nothing had quite prepared me for such disorienting reporting experiences. I heard leaders confessing their urge to "lose control" of their organizations. I watched brick and mortar become symbols of obsolescence. People who once did business on a handshake were starting to do it on a hug, for Pete's sake!
Was I witnessing a change in the ethos of business or just a switch to some new fads? A new dawn or some new Dilbert fodder? These questions forced me to consider business on a level more fundamental than anything I'd attempted as a business editor and reporter. What were the deepest, most fundamental forces guiding business? Why did it exist at all? Could capitalism co-exist with humanism? What was leadership? Where did creativity come from?
"Reality is getting your feet wet," the British biologist Steve Jones remarked. "The only way to approach the truth in snails, or in anything else, is to go out and do the work." My three-year search for answers propelled me to more than one hundred cities in thirty-two states, where I probed industries dealing in everything from microcircuitry to restaurant grease. Along the way I won access to some of today's boldest thinkers about management and economics. I also ranged into the laboratories and lecture halls of scientists whose recent discoveries in the physical world were challenging much of what we've long held true about the commercial world. The answers I found await you in these pages.
This book is a kind of debutante party for the ingenues of the new economy. I off er their stories as proof that business is undergoing a transformation as fundamental yet sudden as water shifting from liquid to gas on the addition of a single degree. It's my aim to trace the origins of these trends, to establish their authenticity, to inform you of the details, and perhaps to inspire your enrollment -- whether as entrepreneur or adviser, manager or employee, builder or trader -- as a pioneer in the new economy.
More than a century ago an eminent scholar of American history, Frederick Jackson Turner, presented his fabled address "The Significance of the Frontier in American History." The frontier expansion, he declared, was "a history of evolution and adaptation," the story of "organs in response to a changed environment." Amid such possibilities, he said, "freedom of opportunity is opened, the cake of custom is broken, and new activities, new lines of growth, new institutions, and new ideals are brought into existence."
Today's pioneers have embarked on a new frontier, some in search of riches, others in search of freedom, all in search of the new. Unlike the West of old this frontier is not one of place. It is a frontier of technologies, ideas, and values. The new pioneers celebrate individuality over conformity among their employees and customers alike. They deploy technology to distribute rather than consolidate authority and creativity. They compete through resilience instead of resistance, through adaptation instead of control. In a time of dizzying complexity and change, they realize that tightly drawn strategies become brittle while shared purpose endures. Capitalism, in short, is merging with humanism.
I don't lightly suggest a connection between business and life or, as Frederick Jackson Turner dared to suggest, between evolution and economics. Indeed when you look deeply enough into a growing organization or spend enough time with thriving entrepreneurs, business begins to look very much like pure biological evolution, propelled into real time on the fuel of human intelligence. Evolution's arrow has endowed us with the skills to take the measure of our surroundings, to collaborate with our colleagues, and, through countless parallel acts, to cause our organizations to adapt, all without central planning or control. Firms acting in parallel create the same patterns of change and order in an economy. And with freedom and deregulation sweeping other nations, the same dynamics are becoming evident around the globe.
We'll take some detours through biology in the pages ahead, and though the side trips will be occasional and brief, they're vital nonetheless. The connection between business and biology is beginning to permeate our culture, with scholars and consultants invoking ecosystems and evolution as metaphors from which business should learn. And in fact the living world is an exemplary design model for business. One is tempted to say that business isn't like nature, business is nature.
Such mental models have awesome power in shaping our institutions. (As Einstein said, "Our theories determine what we measure.") For the proof in business we need look no further than the model that held sway over business for three centuries, one that still persists among many businesspeople, perhaps most. Though the details are a bit daunting -- they were to me, anyway -- a brief reconstruction of this hoary framework is vital to understanding the past from which busines s is escaping and the future toward which it is racing.
It's a story that begins with the apple -- not Eve's, but Isaac's.
Sir Isaac Newton was the new Moses, presenting a few simple equations -- the "laws of nature" -- that never failed in predicting the tides, the orbits, or the movement of any object that could be seen or felt. Output was exactly proportional to input. Every action begat a reaction. Everything was equal to the sum of its parts. The entire universe was seen as a clockworks that could be understood by analyzing the individual parts. Newton's mechanics seemed so universal they became the organizing principle of postfeudal society itself, "the best model of government," as one authority said in 1720. The principles of mechanics inspired Frederick the Great to structure the Prussian army as an assemblage of standardized parts, equipment, and command language.
The very equations of economics, including those in use today, were built explicitly on the principles of mechanics and thermodyanmics, right down to the terms and symbols. The economy was said to have "momentum," or was "gaining steam." A successful company ran like a "well-oiled" or "fine-tuned" machine, a poorly performing company was "off track" or "stuck in low gear." Looms, lathes, engines, presses, and ultimately assembly lines became the metronomes of the human condition.
Most damaging of all, biology itself was corrupted to fit the mechanistic view of economic man. In reality, as scientists now recognize, evolution favors cooperative traits over competitive ones in selecting for fitness. Yet "survival of the fittest" -- the coinage of sociologist Herbert Spencer, erroneously attributed to Darwin -- was comman deered as cover for social domination and capitalist abandon. "The growth of a large business is merely survival of the fittest," a pious John D. Rockefeller once told a Sunday school class. "It is merely the working-out of a law of nature and a law of God."
The Newtonian worldview was appropriate for its time, a reflection of the best in science. It laid the undergirdings of the industrial revolution, creating steam engines, autos, airplanes, and an allied victory in World War II (just as surely as a defeat in Vietnam). The problem with Newtonianism was that upon closer inspection the science turned out to be -- well, wrong, or at best correct only within the tolerances of Newton's instruments. In deep space, as Einstein's general relativity showed, the laws of motion utterly broke down. At the subatomic level, as quantum physics showed, time sometimes went backwards and the same object could be seen in two places at once. Scientists came to terms with the sobering truth that Newton's calculus, their most powerful tool, was only a method of approximation -- and that however useful in smooth, linear problems, the calculus was of no use in studying the preponderance of nature: the motion of currents, the growth of plants, the structure of economies. Classical math and science could explain why the apple fell, as the physicist Per Bak once quipped, but not why the apple existed (much less why Newton was thinking about it).
With Newtonianism crumbling as a mental model, thinkers began looking elsewhere. Across the sciences researchers discovered a world of kaleidoscopic complexity and unpredictability, triggering fundamental revisions. The story of the physical sciences in the twentieth century, no differently than the story of art, literature, and music, is one of qualities taking their place alongside quantities, relationships taking their place with objects, ambiguity taking its place with order.
Except in business. Business (and government, the business of state) slept through every minute of the postmodern awakening. Even as it was toppled from unassailability in science, Newtonian mechanics remained firmly lodged as the mental model of management, from the first stirrings of the industrial revolution right through the advent of modern-day M.B.A. studies. Jobs were divided ever more narrowly, turning workers into so many tiny objects performing mindless, repetitive tasks; the whole, after all, was always equal to the sum of its parts. Management remained an act of calibration and control: input equals output, action equals reaction. History's first management consultant, Frederick Taylor, argued that "all possible brain work should be removed from the shop and placed in the planning or layout department," telling workers, "You are not supposed to think....There are other people paid for thinking around here." To be fair, Taylor was motivated by a wish to improve wages through higher productivity, an effort that union leaders readily supported.
Command-and-control leadership prevailed to the end of the century. Government policy resided safely in the hands of "the best and the brightest." Leaders skilled at control became the leaders of modernity: GM's Alfred Sloan, the United Mine Workers' John L. Lewis, the Pentagon's Robert McNamara, ITT's Harold Geneen. The mainframe computer, housed in its off-limits and tightly sealed glass house, accelerated the centralization of information. E conomics departments and MBA programs taught quantitative methods that continued to treat the workplace and marketplace as clockware: Pay a seamstress another penny and she will produce five more pieces per hour...Each $1 million in national advertising buys you access to so many households. Management's job was assembling the right pieces, pointing them toward the optimum, and then making sure the system never wavered.
Perfectly kind and decent human beings (and some less kind and decent) were blinded to any purpose of organization life other than the optimization of the organization itself. "We are not in business to conduct moral activity. We are not in business to conduct socially responsible activity," IBM chairman John Akers proclaimed in 1986. "We are in business to conduct business." There was, says the humorist Michael Lewis, "noblesse without the slightest trace of oblige." Into the moral void came numbers, only numbers. Optimization demanded intense measurement; all measurements could be abstractly converted to dollars; and profit thus became the principal ethos of business. Indeed, by the end of the 1980s business stood on only two foundations: "re-engineering" (the application of Newtonianism to repair problems created by earlier Newtonianism) and the compulsive search for "shareholder value" -- a valid pursuit except that it came to overwhelm all other expressions of value. "Greed is all right," the Wall Street titan Ivan Boesky famously decreed in a commencement address at Berkeley, a short time before his arrest for insider trading. "I think greed is healthy."
That was then. We can't yet see it everywhere, but a great awakening is now under way in business. In this book we'll explore where and why it's happening, how well it works, and what we can learn from it.
Though their numbers have been slowly building for decades, the new pioneers began appearing in force after the U.S went to war in the Persian Gulf in 1991. It was a time of economic crisis. Business activity worldwide screeched to a halt, first as everyone glued his eyeballs to CNN and then as everyone realized no one else was spending a dime. A deep recession followed, but this recession was different. Instead of furloughing workers until the good times returned, this time business jettisoned workers for good. Just as economic pressures had once created larger and larger organizations, a new set of pressures began pushing business in the opposite direction. The Gulf War recession solidified a new concept in business and a new word in the vernacular: downsizing.
In addition, this time the victims, to an unprecedented degree, were managers, people who had occupied the precincts of ambition. And this time, many of those shown the door found their pockets bulging with severance pay. Like a dandelion gone to seed, the corporate world released these energetic and well-capitalized progeny to the wind. In lobby directories and Yellow Pages, a teeming census of small companies began filling niches of ever-narrowing size. At nearly every level of scale -- across product lines, industries, indeed entire nations -- the small became more numerous and more specialized. Many big corporations became even bigger through consolidation, of course, but they also became less numerous as a result, accounting for a shrinking proportion of total economic activity. The headline-grabbing mega-mergers of the 1990s were mostly a sideshow compared to the splintering of economic power, which not only widened the access to opportunity but reduced the odds that any single failure would bring down others.
The heartbreak of downsizing was undeniable, but so was the thrill of new growth: For every job wiped out at a major company in the mid-1990s, 1.5 jobs sprang up in its place, mostly in small firms. The atomization of industry also stimulated innovation, since it is well established that small firms innovate at roughly twice the rate of large ones. And when the 1990s witnessed the rebirth of American leadership in world markets, it was not the mega-multinationals leading the way. Instead, small and medium-sized businesses accounted for four out of every five new dollars in export sales chalked up in the 1990s. Freed of the bloat, bureaucracy, and other baggage that weigh down their massive counterparts, these smaller businesses have become the avant-garde of the economy and the exemplars of adaptation.
Their example was not wasted on the leviathans of the corporate world. The agility, creativity, and commitment necessary to compete in the 1990s required the minds and emotions of everyone in an enterprise. Major companies in technology and entertainment industries realized their official financial reports were mostly meaningless because, however precise in measuring plant and equipment or revenue and profits, they didn't begin to reflect the "intellectual capital" of the organization or the value added by it. Many companies faddishly embraced the idea of "knowledge management" as if the mind could be made to behave like another piece of gear: Toss in more investment, earn a predicted return. But some others, includ ing a few of the biggest companies in the world, took a more thoughtful approach, questioning their most fundamental precepts of learning and human relations in ways we'll explore in the chapters ahead.
Meanwhile, long-building demographic changes worked in parallel with the new economic forces. Baby boomers -- the best-educated and most independent generation in world history, reared on Dr. Spock, demand feeding, and Jefferson Airplane -- attained the ranks of middle and senior management in great numbers in the early 1990s. Encouraged to "question authority," as a popular bumper sticker once urged, the boomers continued this practice even after the authority was theirs. (As the social commentator Brent Staples has noted, all those kids who danced naked at Woodstock didn't vanish from the planet when they grew up.) Many of these new leaders also had an inkling that happiness and fulfillment in the workplace might actually devolve to the benefit of the organization itself; indeed, in surveying their employees, MCI, Sears, and other giants found a significant link between morale and revenue. What a concept: Treating people individually and with dignity -- the tenet of virtually every religion in the history of the planet -- turns out to be good for business!
Gender compounded the effects of generation: In the early 1990s women became part of the membership and leadership of business, helping to re-emphasize the commercial value of relationships. The ascendancy of minorities in leadership, though halting, broadened the diversity of viewpoints. And in came the so-called Generation X, whose upbringing via day care and divorce created a new kind of wariness toward institutions.
Meanwhile, an intell ectual movement called "systems thinking" took a few modest steps toward validating the retreat from Newtonianism. If Newtonianism sought understanding by taking things apart (the process called "analysis"), systems thinking sought understanding things by putting them together ("synthesis"). Traditional mechanistic thinking emphasized one-way causality: how a parent affects a child, for instance. Systems thinking resists the distinction between cause and effect: parent and child affect one another mutually, and their relationship, in turn, affects other relationships. Systems thinking -- seeing "the big picture," you might say -- entered public consciousness through the ecology movement of the late 1960s, which emphasized the interconnectedness of all living things, and through advances in medicine and psychology, which emphasized family as well as individual wellness. By the early 1990s, this movement had put down roots in the business world as well.
Also right around 1991, the new economic and cultural forces combined with technological forces through the widespread acceptance of Windows. Yes, Windows, a disk full of code that endowed the kludgey personal computer with the liberating simplicity of a kitchen appliance (at least when it wasn't crashing). Just as all those downsized executives were thrown into their spare bedrooms to pioneer in the new economy, an easy-to-use tool met them there, a back-office-in-a-box as well as a medium for looking out on the rest of the world. Nineteen ninety-one was also a threshold year for technology inside large organizations, which for the first time spent more money on computing than every other kind of equipment put together. This signaled the breakup of the mainframe computer, once accessible only to its anointed brotherhood, into millions of desktop units, turning every cubicle and every household into the equivalent of a world headquarters.
Which brings up the last of the forces converging in the early 1990s: the growth of a new global infrastructure, a universal common-carrier network providing small economic players with access to every other player. There was overnight package delivery, toll-free numbers, faxes, pagers, satellite phones, international direct-dial service, real-time desktop video conferencing, and, when nothing but a handshake would do, supersaver fares that put you anywhere in the U.S. for $199. This explained how Jake Albright and his son-in-law Bill Dudleston, working from a garage in the shadow of a grain elevator in central Illinois, could sell stereo speakers at $10,000 a pair to customers in Japan, or why a fellow like John Allen, commuting from an office overlooking the C&O Canal in Washington, D.C., could manufacture children's chewable vitamins in a former chemical-weapons plant in Siberia. In many industries time zones became a bigger factor than distance itself: In Sunnyvale, California, I watched the engineers at Amdahl Corporation programming a prototype computer that was sitting in a development lab in Tokyo; after 12 hours their partners at Hitachi picked up where they left off. A new business magazine called Fast Company sprang up with a motto that described the new age succinctly: "Work is personal. Computing is social. Knowledge is power."
It is a governing theme in this book: Today, everyone in every organization is an entrepreneur, while every entrepreneur belongs to an organization (probably man y). In the old days, when geographical boundaries mattered, the mantra of selling strategy was "location, location, location." The new mantra, for everyone and everything in business, is "connection, connection, connection."
It would be ludicrous to imply that all companies or business people, or even most, have abandoned the old command, control, and count-it-up ethos. Conformity and compliance remain the unwritten rule at many major corporations, perhaps most. Many small business people cannot shake their self-image as the prey in an economy full of predators. For every issue of Fast Company hitting the newsstands, a dozen other publications perpetuate the old stereotypes. "Killer Instinct: Get It Now!" blared the cover of a recent business magazine. Rolf-Ernst Breuer, the chairman of Deutsche Bank, left little doubt of the persistence of command-and-control culture in connection with the December 1998 acquisition of Bankers Trust. "We don't believe in autonomy as an instrument of management and leadership," he told reporters. "As far as it goes, we want a centralized management of the business."
Even worse, much of what passes for a new way of doing business is actually the same old model updated with fresh jargon. What good is "open-book management" when the books tell the wrong story? Why rush to "knowledge management" when the last thing organizations need is more management? "Empowerment," the most patronizing business buzzword to come along in years, perpetuates the harmful notion that an all-knowing management anoints workers with purpose and initiative.
But while the old order persists, the new order is rising alongside it -- haltingly in some places, unevenly in others, but i nexorably in every corner of the economy. How can I be so sure of this? Two reasons.
First, the marketplace leaves companies with little choice. In an era when change arrives without warning and threatens to eradicate the foundations of entire companies and entire industries overnight, organizations can survive only by becoming more human. Businesses that fail to engage the eyes, ears, minds, and emotions of every individual in the organization will find themselves overrun by obsolescence or crushed by competition.
Second, the new, more enlightened way of business will persist because it hews more closely to what we are as humans. One of the many economic paradoxes we'll explore in the pages ahead is that the advancing ethos of business is returning us to what business has sometimes been in the past, and what it was meant to be.
In exploring the frontier of the new pioneers, I have set myself a number of tasks. Chapter 1, "Being in Business," explores the evolution of trade and technology and their origins in the nature of economic man. Chapter 2, "Everyone a Middleman," shows how every entrepreneur finds his role in the new economy and how the changing rules of the game once again favor the small. Chapter 3, "'Have It Your Way,'" illustrates the extraordinary lengths to which pioneering companies go in the service of their customers, while Chapter 4, "What Am I Bid?," explores how the new compact with customers is revolutionizing the most fundamental concepts of pricing.
The book then moves inside the organization. In Chapter 5, "From Planning to Playing," I will show how pioneering companies continually reinvent themselves instead of attempting to control an uncontrollable future. Chap ter 6, "Nobody's as Smart as Everybody," explores the nature of collective learning, its link to self-organization, and the creative dynamics of a place called "the edge of chaos." Chapter 7, "All Together Now," shows how today's diverse and often conflict-prone organizations succeed through shared vision, whose creation has become the new mission of leadership. Chapter 8, "Money and Motivation," suggests that while people may take a job because of what it pays, they remain loyal to it, and give their best to it, for reasons other than what it puts in their pockets.
Lastly the book turns to the wider place of business in society. Chapter 9, "At Home in the Economy," shows how economic pressures are dissolving the artificial cleavage between work life and family life. Chapter 10, "'All My Sons,'" explores how today's economic pressures have transformed social missions from acts of charity into commercial imperatives.
Aldous Huxley, whose Brave New World inspired a generation of fear, later advanced an alternate vision of the future that seemed outlandishly utopian for the time. The engineers of tomorrow, he imagined, would create the tools necessary for everyone to perform "profitable and intrinsically significant work." People at last would win independence from bureaucratic bosses, working as entrepreneurs in their homes, coordinating their actions as "a self-governing, cooperative group." Careers, Huxley imagined, would at last provide "a more humanely satisfying life for people."
For many, Huxley's dream is becoming a reality. Whether in multinational corporations or small home offices, job shops or big factories, people are acquiring the tools to pursue profitable and intrinsically significant work. They are pursuing and fulfilling their own concepts of themselves. These newly liberated entrepreneurs, as Huxley dared to dream, are casting themselves together as a self-directed lot and providing once unimaginable rewards to themselves and their fellow humans. And all indications suggest that these changes are just beginning. In the age of adaptation, there is no endgame, no optimum, no finale. There is only what comes next, and how we shape it.
Copyright © 1999 by Thomas Petzinger, Jr.
2. What does the answer to the preceding question say about structuring your business? Treating your employees? Dealing with your customers?
3. Among the dozens of case studies presented in this book, which mostly closely fits your business and why? Which cases diverge most starkly -- and what do the differences reveal?
4. Should firms seek the "one best way" of doing business, or should they instead seek to adapt continually to changing surroundings -- even at greater cost in the short term? How do firms obtain information from their environments -- and who within the firm should react to it?
5. How can a small set of simple rules create an infinite number of potentially good results?
6. Why does creativity flourish at "the edge of chaos?"