(p.159) Appendix 1 Management Lessons
(p.159) Appendix 1 Management Lessons
In this appendix we aim to put in perspective key generalizable managerial observations we can draw from the Nokia story, based on our CORE framework. Our hope is that you will find them of value in your own leadership work. Not all of them will be equally relevant to your specific individual circumstances of course, but you may alight on some that give you food for thought.
Sources of Rigidity
As companies mature, their strategy making naturally becomes more rigid. Our observations, at Nokia and elsewhere, suggest that a few sources of rigidity need to be watched particularly carefully:
• Success begets failure because of basic attribution mistakes: we usually attribute success to our merits and failure to overwhelming external forces. This leads us to become overconfident, lower our guard in watching for possible impending changes, and implicitly believe the future can be extrapolated from past and current situations.
• Success also breeds conservatism: i.e. a concern with protecting what we have achieved and a tendency to become risk-averse, in particular toward new opportunities in areas we are not thoroughly familiar with.
• Successful past commitments leave a legacy: a large installed base with loyal customers reluctant to incur switching costs and a large staff proficient with and committed to specific technologies, processes, and know-how become a source of active inertia, defending the status quo and denying the need for change. Incumbent companies easily become hostage to their past commitments.
• Our existing business model and day-to-day operational requirements drive us to cultivate certain capabilities and ignore others. When changes take place, we may well face a capability trap, where we find all we can do is more of the same. We may also face a divergence between our capability scope (where our capabilities should take us next), and market scope—the proverbial “What business are we (or ought we to be) in?” Both matter—there is no point being in an attractive (p.160) business without the right capabilities, nor letting our capabilities drive us toward risky and unprofitable opportunities.
• Outside parties, customers, major shareholders, strategic partners, industry pundits, and regulators can excessively and unduly influence one’s sense-making, particularly in adhering to a “being close to customers” logic.
• In facing a discontinuity, such as the advent of Internet-based communications, it is not just strategic choices that need to change, but the way they are made and the way we think of strategy (e.g. from convergence to envelopment, from products to ecosystems, from market competition to collaboration for value creation and competition for value capture). A new reality of a different nature calls for a new strategy-making paradigm.
Barriers to Foresight
So, we constantly need to free our organizations from the past, and actively seek to develop a new, forward-looking understanding. Obvious as this is in theory, it is hard to practice as:
• Failure of cognition may not result from ignorance or lack of information, or even poor foresight, but from inadequate sense-making—i.e. not making effective sense of available information.
• Sense-making is often inadequate because cognitive frames are inherited from past experiences that are no longer appropriate and fail to direct attention to critical aspects of the current predicament. It becomes an “unknown unknowns” challenge.
• This makes poor sense-making hard to detect, in particular because “using the right words” does not necessarily denote true understanding of a situation. It is possible to speak intelligently of something without understanding it and its strategic consequences.
• Shedding and forgetting rather than accumulating and layering orthodoxies (that become decision-making heuristics) is a key process that we often overlook. Periodically reviewing our key tacit and taken-for-granted assumptions is thus a very healthy practice.
The Value of Cognitive Diversity and Openness to the World
• Differences and complementarities in the perspectives and thought processes of members of the top team are a significant asset, provided this diversity is effectively reconciled and perspectives are integrated into a common collective commitment. This calls for a dialog rather than debate about which individual idea or proposal is best. Too little diversity in cognition, communication style, and attitude toward time leads to “group think,” while too much leads to irreconcilable differences, conflicts, and either a rush to action or procrastination.
• Openness to information and sense-making from the outside is important. This may happen naturally in the home country of a company. However, as a company internationalizes, learning from a periphery which is more distant geographically and culturally becomes increasingly difficult. This requires purposive and deliberate (p.161) sensing for new information and knowledge, and attention to how these are conveyed back to the center. It also calls for more participative strategy development processes. Failure to do so results in a company becoming or remaining excessively home-centric.
• Ethnocentricity in the composition of management reinforces a narrow framing tendency, and needs to be offset by active international recruiting and making sure foreign managers do not run into a “glass ceiling” as their career progresses.
• First and foremost, there is a need for harmony between the following three factors: (1) the different elements in the actual external environment of a business—i.e. its customers, competitors, evolving technologies, regulatory context, and effective business models; (2) how this external environment is made sense of, and how management perceptions are framed and articulated into a shared, accurate, and meaningful strategic understanding of the company’s position that can inform, orient, and guide management decisions; and (3), how structure, systems, and processes guide managers in decisions and actions. The structure of the organization, its decision rules and processes, and its measurements, rewards, and punishments all shape, filter, and drive managers’ perceptions and their responses to external requirements. In particular, they shape key resource allocation decisions, such as new product development. This forms a structural context to resource commitments.
• As companies grow in size and complexity, and as they mature, the architecture of the structural context becomes increasingly important in shaping and driving increasingly decentralized decisions on the part of middle managers.
• A key role of an effective and coherent structural context is to overcome silos and integrate many decisions, including decisions on tuning management systems, so they fit together and provide a common direction.
• To unleash entrepreneurship without proper corresponding integrative mechanisms leads to conflicts, stasis, and stalemates.
• Mismatches between (sometimes implicit) internal governance logics, such as conglomerate-like financial control, and the nature and extent of interdependencies, mainly around shared resources and common customers, lead to customer dissatisfaction and internal paralysis.
The Difficulties of Reorganization
• Process trumps structure. “Reorganizing” to redirect strategy, for instance toward new opportunities, remains ineffective without attention to enabling and optimizing key strategic processes (such as resource allocation, product policy, sales priorities, etc.) and providing the right incentives for managers to support these processes and work accordingly.
(p.162) • Reorganizing needs to be forward-looking, intercepting forthcoming strategic requirements rather than remedying past pain points. Problem-solving reorganization is not only short-sighted but even backward-looking. Addressing pain points may be needed to keep commitment and show concern for employees, but should not drive organizational choices.
• To count on middle managers in core businesses undertaking “bottom-up” renewal initiatives is more than often illusory, particularly in an integrated dominant core business. Room for such initiatives is limited and incentives, career progression concerns, as well as narrow attention focus (on mostly operational tasks) limit self-initiated renewal activities. Lack of business “adjacencies” and of bridging technologies toward new, more distant opportunities further constrains such initiatives.
• Corporate venturing may not bring renewal, and not just for reasons of scope. There may be a time horizon mismatch, with long-term ambitions and mid-term measurements. Or there may be a lack of “bridging” technologies and possible intermediate market definitions. Finally, there may not be room for “in-market” experiments between where we are and exploiting new opportunities.
• As a company grows, the loyalty of its members needs to shift from loyalty to individuals (founder, turnaround CEO) to loyalty to the organization, as an institution, and to the integrity of its processes. If a company grows very fast it may not have the time needed for that transformation.
• Complex organizations put high demands on their members, in particular collaboration and integrative win–win bargaining around the management of interdependencies. These demands may be too strong for some. Introducing a complex organization—such as a matrix—without attention to preparing and training those that will have to make it work, may lead to very disappointing results, often exactly the opposite of what the matrix organization was meant to achieve.
• Strong and enduring “frictions” in a complex organization are highly damaging. They slow down decisions, make them painful to reach, and weaken commitments. This may become lethal in fast-moving environments. At the individual level, they not only breed frustration, resistance, and anger, they also turn competitive energies inward against colleagues. Personal “wear and tear” is high, and the best people usually leave. The cultural fabric of the organization is also easily torn.
• A very simple business model, and its attending activity system, is a source of rigidity, but so is a very complex one. In a simple model, every element and relationship counts, and departing from the current efficiency optimum is difficult. Any change carries a risk. In a complex business model, all the causal intricacies of how its various components and relationships work together may not be fully understood. If the business model grew in complexity over time, its systemic properties will not all be known and so any change will face a high degree of uncertainty.
(p.163) • Personal likes and dislikes and individual self-interest will always find their way into clouding assessments and decisions. To deny this and pretend to pursue the common good is at best naïve, and more usually Machiavellian (making self-interest parade as common interest).
• So, as a business grows and matures, so does the need to build institutionally fair processes that contain self-interest and provide checks and balances to regulate the self-interested search for power.
• In a mature business, process trumps people—i.e. tasks, roles, responsibilities, and relationships are well specified and understood by all. But in a new or adolescent business individuals are of paramount importance. Changes in key appointments and roles have a stronger impact and will result in unintended consequences. It is difficult to find a balance between leaving executives in place for too long with the risk they become barons, and moving them but risking damage to relationships and commitment.
• One of the greatest dangers is that, as a company matures and keeps succeeding, the key people, who would have had the flexibility and openness to change its course and reform roles, responsibilities, and relationships in the organization, leave. Their successors do not know how to drive change.
• The board has a role to play in preventing personal ambition and power from becoming dominant factors. This requires an independent board, willing and able to challenge the CEO on both process issues (How are strategic decisions made?) and substantive issues (How wise and timely are they?). In many companies, the evolution of board composition and governance methods may not be up to this requirement. Successful CEOs may also dull directors’ attention.
• Shareholders and boards are sometimes ambivalent about narcissistic tendencies in leaders. These provide the drive, energy, stamina, and the will to win that are often essential to success as a CEO. But colleagues and subordinates may bear the brunt of difficult personalities and, over time, lose commitment.
• Articulating powerful ethical mission statements (or, if you are skeptical, “slogans”) can be a powerful and emotional source of commitment and energy. In other words, “doing good” (for the world) not just “doing well” (for shareholders) matters.
• Management systems and processes have to acknowledge the irrepressible influence of emotions, and thus leave some room for them to be legitimately expressed.
• Measurement, assessment, and reward systems carry perhaps the highest and most obvious emotional content. Approaches to assessment that give a strong role to personal evaluations by superiors require trust, transparency, and mutual understanding to be effective. They also require a strong-enough substantive basis for a well-founded assessment. If work is highly fragmented on multiple projects, as in a “software factory,” assessment becomes difficult and its outcome uncertain. (p.164) Conversely, an assessment system that puts all the emphasis on numbers may be resented as being blind to individual originality and ignoring the development potential of individuals. Here too, it is a question of balance—being too qualitative or too quantitative are both sources of demotivation.
• In managing change, we often tend to overlook the importance of deep emotional working identity and self-worth issues. The most delicate barrier to change is not intellectual (Does this change make sense?) or self-interest (Will I benefit from it, is it in my interest?), but emotional (Will it challenge, compromise, devalue my professional identity, and compromise my self-esteem? Will I know how to play by the new rules it implements?). So, in implementing change, this emotional challenge needs to be addressed first—at the skills and behavior level—before rejigging management systems and processes, or explaining why change is needed strategically.
• Emotional engagement is not easily scalable, in other words we can be emotionally committed to our small team, to a boss we like, to our subunit, to our business perhaps, but seldom to a large organization. Middle managers thus have to play a key role as “emotional relays” up and down and also sideways. Neglecting the importance of this role leads to a loss of engagement.