Edited by Roxanne Toothman, M.S.
March 7, 2011

We can learn more about leadership and change management in a few mornings than reading any number of books and articles.

To reach this, we settled on a very simple–to our mind, almost simplistic–way to begin the discussion. We can compare the performance of IOUF with that of other national and international universities by reading their annual reports. The comparison is as follows:

The Relative Performance of IOUF

IOUF	Indian Universities	US Universities
Students / Teachers	25	4	15
Drop-out	17%	44%	32%
Cost/Student	21,000	135,500	320,000
Honorarium	4,000	2,500	22,000
Reserves	15%	-7%	25%
Profit	8%	2%	24%
Student satisfaction	XXXX	X	XX

• In the IOUF distance learning strategy, it is possible for professors to give guidance to 25 distance learners on BA/MA level. It would be better if the number of students were lower.
• The dropout rate is much lower in comparison with that of other institutions of higher education. Still it is too high if we take into account that most students have to pay their own tuition fees.
• Costs per student are reasonable in relation with the economic level of the country.
• The honorariums for our top-level professors and counselors are higher in comparison with their Indian colleagues. However, because of the high academic level of the IOUF courses, we only can appoint the best academics to develop new courses and to guide the students. Consequently, it is necessary to be competitive in honorariums in order to attract the best professors.
• Reserves for innovation and research are relatively low.
• Although IOUF is a non-profit organization, it is allowed to make some profit to be used for extraordinary expenses, such as special awards, seminars, overseas meetings, advertising, publications, internal education research and experiments, etc.
• Based on research, the student appreciation for IOUF is high.

What are we going to do about this situation? Although there is no need to be alarmed about this data, there also is no reason to be complacent. Performance improvement is a continuous process. The economic position is not strong enough, e.g. for financial support of projects in the developing world. The problem of management in different cultures is that it allows various management structures and approaches without frustrating the basic principles of the university. What are we going to do about it? How can the performance be improved?

The answer is simple. It lies in a disease called “satisfactory underperformance.” It is a disease that is very easy to catch–indeed, finding a way to avoid it is the difficult part.

The dynamics of satisfactory underperformance

In this pathology, we can see the following stages:

• i) Successful basic strategy;
• ii) Competitiveness, growth, and profits;
• iii) Managers begin to believe they are the best;
• iv) Builds layers of staff to cope with the growth;
• v) External arrogance and internal focus on control;
• vi) Initiative and innovation stifled;
• vii) Gradual decline into satisfactory underperformance and then to crisis.

Radical performance improvement is possible

This is the first and essential prerequisite for creating and managing change–senior managers have to develop the belief that radical change is possible. Moreover, it is possible to achieve such non-incremental improvements within a reasonably short period.

There is a sort of “religion” in the field of management that we call “incrementalism.” It is based on the belief that everything in the management of companies and other institutions happened slowly and incrementally. It comes with its own rituals and metaphors–like the analogy of supertankers. These tankers turn slowly, in long turning circles–ditto for companies. You cannot push them too much or too fast. You have to have patience; you need to be pragmatic. Most Indian managers practice it, knowingly and unknowingly. They have been brought up in an era of crippling regulations, bureaucratic dominance, and poor systems and infrastructures when the tenets of this religion tended to be valid most of the time. That is how they were converted to this faith. They do not care for words like “radical change.” They find the concept too childish, too unsophisticated, and too un-Indian. For them, it is difficult to convert once again to the faith of radical performance improvement.

A few facts:

• – Outstanding performance can be achieved even when competitors are much bigger and stronger;
• – Radical performance improvement is possible even when you are already successful;
• – Charismatic leadership is not a prerequisite for radical performance improvement.

Learning to cook Sweet and Sour

IMPROVING RESOURCE PRODUCTIVITY (SOUR)	CREATING AND EXPLOITING NEW OPPORTUNITIES (SWEET)
Eliminating low-return activities	Growth (new products and markets)
Improving labor productivity	Building competencies (resources)
Improving operating efficiency	Organizational capabilities
(speed, reducing waste)
Improving capital productivity	(revitalizing organization and people)

Downward trend of Rationalization

Poor performance –> Cut resources: sell businesses, close factories, sack people –> Temporary improvement in results –> Underlying problems not solved –> Performance declines again –> Cut again –> etc.

Transformation from start to a good end

The process of transformation change involves a great deal of fear and intense pain. Top-level managers in many Indian companies have picked up the rhetoric of transformation. Indeed, in the current context of rapid economic, technological, and competitive change, organizations and culture need to court change strategies to survive. Unfortunately, Most of these managers have only an intellectual understanding of the changes that are necessary. They have no experience of the emotional roller coaster that such transformational processes involve. For this change to happen, they have to manage both the intellectual and the emotional aspects. Of the two, the latter is by far the more difficult and the more draining.

Transformation change is a journey through the “valley of death.” In different phases of the journey, the organization will experience some very different kinds of emotions–from complacency, denial, and resistance to anger and depression, and finally to exploration, enthusiasm, and commitment.

Emotional energy –> denial ( -) –> finger pointing (–) –> outburst (—) –> Depression (—-) –-> Curiosity (+) –-> Identification (++) –-> Excitement (+++)

To lead a company through this journey, top-level managers must learn to anticipate these emotions and have the courage and the wisdom to cope with them. At each phase, the leadership task is very different and the roles the leaders play must radically change in the course of the journey.

As the discussion about transformational change first enters the agenda, most managers feel energized. This is the complacency stage, the euphoria of the ignorant.

Then, as the benchmarking process reveals deep gaps between the capabilities and performance and those of its best-in-class rivals, the complacency gradually gives way to rationalization and denial. “The numbers are wrong.” First, the comparisons are denied. Then, as the truth of the performance gap becomes impossible to deny, valiant rationalization ensues. “How can you compare our performance with theirs?”

As these layers of rationalization gradually melt away and the obvious conclusion of managerial mediocrity stares people in the face, denial gives way to finger pointing. “I am doing great; the others are wrong.”

A deeper analysis begins to show that the gaps are indeed pervasive; the outburst finally happens. “Who are you to say such things? Has the company lost all respect for human dignity? Why are we doing all this?”

Senior managers tend to lead this outburst. Long used to the defense and adulation appropriate for the size of their office suites and exposed for the first time to the reality of their feeble contributions and managerial ineffectiveness, anger becomes their sole defense mechanism.

Leaders, strong enough to push the organization beyond this stage of outburst finally arrive at the lowest point of the valley–depression. This is when people finally give in and give up. “I accept that I am terrible.” Being the toughest phase to plough through, this is also the first sight of the light at the end of the tunnel.

Persist beyond the downing of tools, and you begin to get the first glimpse of exploration, of curiosity, and of a sense of possibility. Not everything is rotten. There are nuggets of high-class resources and of interesting opportunities. As a few instances of successful change begin to filter through, at least some people begin to believe in the promises of a future.

Nurture these beliefs, support and celebrate the successes, and gradually the energy will rise again. Curiosity about the future will lead to commitment and the sense of possibility will expand into the excitement of creation.

Change versus Transformation

Not all institutes need transformation. Typically, institutions need to change some aspects of their strategy, while retaining others. That is dynamic change.

Transformation, in contrast, is the systematic and simultaneous attack across many fronts that fundamentally alter the basic rhythm and character of a company.

PHASE SYMPTOMS	LEADERSHIP’S ROLE
Denial	> Rationalization > Focus on the past > Withdrawal	> Confront with information >Project consequences of “Business as usual” > Provide illustrations
Resistance	> Anger and blame > Downing the tools > Provide illustrations  > The institute does not care	> Listen to what is said and not said  > Shared mourning  > Show personal commitment > Cut losses when unavoidable
Exploration	> Over preparation > Incoherent energy > Confusion, chaos	> Guide priorities > Educate to improve quality of analysis > Set short-term goals
Commitment	> Cooperation and Coordination  > Frustration about speed > looking for new challenges	> Set long-term goals > Celebrate success > Focus on team building > step back–>let the next tier of leadership emerge

In the early part of the journey, in the complacency and denial phases, leaders must be brutal in their challenge. They must confront with information, project the problems of “business as usual,” and provide illustrations of these consequences. For example, it is essential to use all available data to ruthlessly expose the truth. The task of making a group of complacent managers confront the reality of the institute’s mediocrity needs a heavy hand. Worst of all, in this phase the leaders must also confront and publicly acknowledge their own failings. Managers must take most of the blame for the past inertia that has led to the need for transformation.

In the next phase of anger and depression, a heavy hand will serve to merely destroy. The need, in this phase is for empathy, understanding, and a collective sharing of grief. The leaders must learn to listen, not only what is being said, but also to what is not being said. They need to show personal commitment. In addition, this is the period of mercy killing–they must cut losses when unavoidable.

As the organization turns the corner into the first signs of curiosity and exploration, the symptoms change. Downing the tools gives way to over-preparation; the feeling that the institute does not care is replaced by incoherent energy. There is the confusion of multiple initiatives, the chaos of diverse projects, and divergent local leaderships. At this stage, the task of top management changes to one of the guiding priorities–educating to improve the quality of analysis and presenting short-term goals to direct the process.

Finally, the role of leadership evolves into setting long-term goals and of rebuilding teams and trust. Gradually, those who have led the process so far must step back from the front line, letting others take on visible leadership roles, while they retreat into the background role of embodying and projecting the vision and values of the institute while coaching the new leaders.

The Institute as a Continuous Learning Model

Dr. Yoshio Maruta introduced himself as a Buddhist scholar first, and as the president of the Kao Corporation second. The order was significant, for it revealed the philosophy behind Kao and its phenomenal success in Japan. Kao was a company that not only learned, but also “learned how to learn.” It was, in Dr. Maruta’s words, “an educational institution in which everyone is a potential teacher.”

Under the direction of Maruta, the dedication to learning had metamorphosed into a competitive weapon that, in the 1990s, had elevated Kao to one of the most admired companies in Japan. The success lay not only in its mastery of technologies and its efficient marketing and information systems, but also in its ability to integrate and enhance these capabilities through continuous learning. As a result, Kao had come up with a stream of new products ahead of its local competitors.

The reframing of Kao by Maruta, not only as a soap and detergent company but also as an educational institution, tapped into a fundamental reality of human nature. People are innately curious and, as social animals, are naturally motivated to interact and learn more from one another. Over thousands of years, families, clans, and broader social groups have evolved as teaching and learning communities, with individuals sharing information and synthesizing knowledge as a key engine of their individual as well as collective progress.

To achieve this, managers have to open their organizations and their people to the invigorating force of continuous learning. Like Maruta, they have to think of their organizations not just as a portfolio of business, their people not as mere factors of production; they have to view the company as an educational institution and recognize that competitive advantage flows from people’s ability to enhance their knowledge and skills constantly. The more difficult part of redesigning a company as a learning center is to reshape its work methods, information flows and management processes to create continuous self-development opportunities for people within the daily routines.

Continuing Education

The slogan for Unesco from the 70’s has been “life-long education.” It is remarkable that many companies have understood this very clearly.

Intel Corporation, e.g., the world’s largest and most profitable semiconductor company, has a relatively young workforce. However, most of the technologies used in Intel’s Pentium chip did not exist when its scientists finished their graduate studies. Without very large investments in continuing education, (Intel has its own university with a plethora of courses that employees can self-nominate themselves to.), it participates in a considerable variety of external courses offered by universities and consultants. It offers a sabbatical scheme so that people can take time off to go back to school, either as a faculty or as a student. Intel simply could not survive in its business. Continuous skill updating of its employees is not a “feel good” factor for Intel’s management; it is a prerequisite for the company’s competitiveness and survival.

In most Indian companies, continuing education is still treated as a luxury and a diversion. Senior managers are occasionally sent off to a course in a hill station while junior employees ritualistically attend in-house training programs that have little relevance to their tasks and have undergone little change in a decade. Top management tolerates the expense as a symbol of the company’s modernity while employees treat the programs as the next best thing to a paid vacation. With no skin in the game from either side, the activity becomes very peripheral to the business.

In contrast, continuing education is one of the few things that are mandated by the corporate top management of Motorola and is carefully monitored and controlled throughout the company. Every employee, including the chief executive, has to undergo forty hours of formal course work at the minimum each year. Education is managed by the corporate head office in Chicago through its large and well-funded Motorola University that has branches all over the world.

Courses are tailor-made to respond to current business needs and include not just discussions on the state-of-the-art management concepts and practices but also extensive involvement of senior managers and actual work on specific and important business problems. A vast range of short seminars on specific topics allows Motorola employees around the world to fill in specific gaps in their knowledge and skills. It is this commitment to education that has allowed Motorola to launch and implement its much imitated “six-sigma” total quality program. At the same time, the reputation of Motorola University has increasingly become a key source of the company’s competitive advantage in recruiting and retaining the best graduates from the leading schools in every country in which it operates.

Implications for IOU

Although life-long education is a topic in the basic philosophy of the Intercultural Open University, in most cases the university administration only applies this to the learning of students. Internally, however, there nearly does not exist a systematic in-door training and education for administrative and academic staff. It is obvious that the thinking has been that educators do not need this kind of approach because they are educators by profession. We are afraid, however, that this is a big mistake.

As a general worldwide observation, we can state that teachers at primary level are usually well trained in pedagogical and didactical aspects. Even after years of working in schools, many times refresher courses are organized. This not only has been done in the industrialized world but also in the so-called developing countries. In many African countries, on-the-job training has been organized. Already in the 70’s under direction of Unesco, these courses were held in Kenya for more than 30,000 teachers; management courses were held by distance learning methods for 6,000 headmasters. This was a model for Nigeria and some 40 other African countries. (Reports of Jan R. Hakemulder, Regional Consultant of the United Nations, 1970-1980)

Although in Western countries, the didactical level of teachers in primary schools is satisfactory, the situation is less good at secondary and even worse at the university level. To concentrate on the last, university professors may be good in their special subject; most of them are lousy teachers. Although universities are meant for research and education, in many cases professors regard teaching as a boring part of their work. They have no idea about how to “get the message across.” Because they regard themselves as the untouchable specialists in their subject, they resist to be trained in didactics. This may be the success of distance learning.

More and more, however, the university administration including that of IOUF does not accept this behavior of low educational results. In the case of IOUF, it is the firm conviction that there is no need to avoid conflict. “You get the necessary training or leave!” On top of that, evaluation reports are being made by students and based on the results, there is an opportunity to improve the educational contributions of the academics.

Of course, one of the basics of success of distance learning is that most of the courses are based on modern psychological and didactical approaches and prepared by teams of academics, educational specialists, artists, media experts, etc. Not necessarily own university courses need to be developed. The university can make use of some of the excellent publications by the international publishing houses. Because of the quick development of communication media, students are in a much better position to fulfill the tasks for their studies at a place and time of their choice. In fact, they prefer this approach above sitting in lecture rooms where they most of the times have to listen to boring lectures.

As an institution for higher education, IOUF has to be aware of the need for continuous staff training. In special cases, this can be done by the method of distance learning, but also by group meetings. In many cases, tailor-made courses are necessary. A university constantly is in a stream of changes–scientifically, organizationally, and educationally–and the participants in such an organization have to be aware of what is happening. This certainly applies to a university because such an organization is a holistic unity of various faculties. Consequently, not only the academic group needs continuous education, the same is true for the administrative and technical support groups. Many times, it will even be necessary to bring the groups together in order to solve problems and get to know importance of the work of each other.

The computer network makes it easy wherever needed to get all the information from all departments in the university and from outside departments.

Redesigning the work

In traditional organizations, work is structured to maximize predictability and control. However, such as structure of work inevitably leads to the de-skilling of employees. Predictability and control in work is possible only when tasks are defined specifically and narrowly. Ultimately, the logic of such structuring of work is based on the insights of Adam Smith and Frederick Taylor: that the benefits of large organizations derive from economies of specialization and, therefore, the best way to run such organizations is to subdivide activities into routine tasks that can be easily measured and controlled. Nevertheless, to stay with Adam Smith’s famous example, after years of making pinheads, an employee loses all abilities other than those required for making pinheads, and the company loses all flexibility and can only remain a pin factory. As a highly automated assembly-line operation, the factory represents a classical prototype of the dehumanizing and de-skilling production technology that Charlie Chaplin depicted in Modern Times.

While both the company’s and the individual’s losses from such de-skilling have been widely recognized, some managers believe these to be the unavoidable costs for achieving efficiency and productivity. These managers may find the “pathfinders system” interesting that was introduced by Volkswagen. Its purpose is “to get every worker to become a passionate collector of skills and qualifications, as a way to reduce his or her boredom and to enhance his or her employment security.”

In this system the specific skills that are associated with each of the different jobs in the factory. At the same time, it structures these skills in a set of hierarchies–the paths–with each preceding skill facilitating a worker’s ability to acquire the next skill in the path. In consultation with his or her supervisor, each employee of the company has chosen one of these paths as his or her personal development goal. This means that the workforce can be used flexibly.

This kind of flexibility also can be used in a university. In fact, university teachers already need to be flexible in order to include the constant changes in their subject of specialization and to learn how to apply the changing educational field because of further developing technological possibilities. On top of that, professors need to work with teams of scholars to become aware of related subjects and even to be able to teach outside the narrow limits of their specialty. This makes them aware of other subjects and gives their subject a complete wealth of the sciences.

Democratizing Information

Dr. Maruta described learning as “a frame of mind, a daily matter” in which truth had to be sought through discussions, by testing and investigating concrete ideas until something was learned, often without the learner realizing it.

The primary raw material for this learning process is information. Maruta regarded information not as something lifeless to be stored, but as knowledge to be shared and exploited to the utmost. He repeatedly reminded his managers “in today’s business world, information is the only source of competitive advantage. The organization that develops a monopoly on information, and has the ability to learn from it continuously, is the company that will win, irrespective of its business.”

However, a vital requirement for information to be used in this way is its democratization. “In order to make it effective to discuss subjects freely, it is necessary to share all information,” said Maruta, “If someone has special and crucial information that other’s do not have, that is against human equality, and will deprive us and the organization of real creativity.”

In Kao, every manager and most workers had fax machines in their homes to receive results and news, and a bi-weekly newspaper kept them informed of competitors’ moves, new product launches, overseas developments and outcomes of key meetings. Terminals installed throughout the company ensured that any employee could, if they wished, retrieve data on sales records of any product for any of the company’s numerous outlets or product development at their own or other branches.

This democratizing information is not only important for companies but is even more vital for universities. In several overseas departments of IOUF, this has been fully applied. On the computer networks of the various national departments, everybody is able to find whatever is wanted. Although democratizing of information has gone as far as possible, for IOUF there still is a minimum of classified information. This is related especially to data that might be in contrast with privacy, such as sensitive personal information about students and political information that might endanger the security of staff. This kind of classified information only is available to members of the senior security committee.

Senior Staff as Faculty

While day-to-day tasks need to be redesigned to provide opportunities for deepening the operational skills of employees, it is equally necessary to reshape the broader strategic and administrative processes of an organization to broaden people’s analytical and conceptual skills, and to enhance their quality of thinking and judgment. Less tangible and concrete, these latter sets of skills and capabilities are perhaps the more crucial for enabling them to take responsibility for the organization’s competitiveness. At the same time, widening employee access to these skills requires radical changes in the organization’s core management processes, a far more daunting task than re-engineering day-to-day operations.

In most companies and organizations, strategic thinking and qualitative judgment are seen as the preserves of top management, and it is only those who are part of it who have the opportunity to develop these capabilities. To move up relevant information that typically resides at the operating levels, organizations create elaborate systems of planning, communication, and control.

Junior employees provide the information in a variety of scheduled and unscheduled reports, often in standardized formats, and these reports are processed through complex systems to establish consolidated inputs for decision-making. Such a formal, systems-driven management process is often viewed as the essence of professional management, with the elaborateness of the systems as the measure of the organization’s managerial sophistication.

Such systems, however, act as a shield, preventing people below from participating in the strategic debates and thereby insulating them from the learning potential of such debates. Because of their position and their accumulated experience, top managers develop broader perspectives and sharper intuitions that are perhaps the greatest gifts they can give to those lower down in the organization. However, it is only through constant interaction that these capabilities can be passed on.

To create opportunities for such direct interaction, organizations need to fundamentally reshape their management processes, cutting out much of the elaborate infrastructure of information, planning and control systems they have built, so that information can flow through direct relationships, strategy can be framed through shared debate and implementation can be guided through personal mentoring and coaching.

One can view work as something fluid and flexible, like the functions of the human body. Therefore, the organization has to be designed to run as a flowing system that would stimulate interaction and the spread of ideas in every direction and at every level. No one owns an idea; ideas have to be shared in order to enhance their value and achieve enlightenment in order to make the right decision. By inviting all the relevant actors to join in with forging the task, we achieve a common perspective or view.

Revitalizing People

No company or institution can achieve radical improvement in performance without revitalizing people. Put it this way, most managers will readily accept this assertion. However, what does “revitalizing people” really mean? Most will interpret this as an attitudinal change. There is a new word every time this topic comes up and the new word now is “mindset change.” In recent years, many companies have launched expensive, large-scale culture change programs with this objective.

However, when you ask: How likely is that? Can you change people’s attitudes? Can you really teach old dogs new tricks? The answers are unambiguous–very unlikely. Generally, adults do not change their fundamental attitudes. Well, occasionally they do, but only in response to a profound personal tragedy, such as the death of a spouse or a child. Otherwise, things happening in their professional lives do not change attitudes–not of adults.

Now we have a dilemma. Renewing strategies requires revitalizing people–that is, changing people’s mindsets. If you cannot teach old dogs new tricks, where does that leave us?

Resolution of the dilemma lies in the recognition that revitalizing people is not about changing their fundamental attitudes. The same individual, with the same attitude and personality traits, can behave very differently in different contexts. It is possible to change behavior without necessarily having to change basic attitudes.

The challenge of changing behavior at work, then, is much more about changing the context that managers create around their people. Every company or institution has an internal behavioral context that shapes how people within the company or institution think, feel and act. To change behavior, that context has to be changed. The responsibility for creating the behavioral context lies at the level of senior managers. Therefore, senior managers must change their views about management and their actions in the workplace–for only then will people lower down change their own behavior.

Having good people is not enough, because there is need to create the context in which good people can become the best they can be and perform at the highest level.

“The Smell of the Place”

We intellectualize a lot in management. The reality is that you can walk into an office or a school and in the first 15 to 20 minutes, you will get the smell. You will get the smell in the people’s eyes, how they walk about and their body language. Typically, their internal contexts suffer from four debilitating characteristics.

The “Smell of the Place” in most traditional companies and offices

CONSTRAINT

/

CONTROL ================== CONTRACT

COMPLIANCE

The first characteristic is constraint. Top-level managers make all decisions and make all the choices. They are very wise; they have lots of information; they have very good staff. They create wonderful strategies. They also work very hard. They also are able to tell everyone exactly what needs to be done. What does it mean for people working in the offices, in the schools eight levels below them? What does all that hard work, all those decisions, and all those strategies boil down to for the people on lower levels? Constraints. This is how they feel about the stuff that comes down from the top-constraints on how they can use their own initiative, creativity, and thinking; constraints on the choices they can make; constraints on the joy and excitement they can derive from acting on their own steam.

The second characteristic is compliance. Top-managers create all kinds of systems–human resource systems, budget systems, etc. Each system by itself is totally justified. However, collectively, what feelings do they create for the employees down on the other floors? Compliance. All those systems hang like a black cloud over them and must be complied with.

Another pervasive aspect of the context within most large companies is control. Why does the boss exist? Not just the direct boss, why does the entire management infrastructure exist? As far as the humble employees eight floors below the top can tell, they exist for one reason and one reason alone: to control them and to ensure that they do not do the wrong things.

Finally contract. We are increasingly using the word in every aspect of business, certainly in the West, but increasingly in India. The job is a contract. The budget is a personal contract. Transfer prices are contracts. Relationships between colleagues, departments, and divisions are all contracts.

That is the internal environment, defined by constraint, compliance, control, and contract. That is the smell of the place in the front-line units of many companies. Yet what is the behavior that institutions want from their people? They want employees to take initiative. They want their people to learn continuously and bring the benefits of that learning to the institute. They want them to support its success. They want people to collaborate, to share, and to help each other. They want their people to feel a sense of commitment to the organization. How can managers elicit these responses if they create context defined by constraint, compliances, control and contract around their people?

The “Smell of the Place” for Organizational Renewal

Learning STRETCH Commitment

Collaboration

SUPPORT TRUST

Initiative

Persistence DISCIPLINE Confidence

What is stretch? As we have described before, large organizations often fall victim of the disease of “satisfactory underperformance.” By the time the organization falls into a crisis, change becomes easy. The real problem is not when the organization is in crisis. The real problem is often the long period before the crisis hits, when the company coasts along in this mode of satisfactory under-performance. Everyone within the organization knows that, given the organization’s resources, quality, technology, people, and so on, it is not doing as well as it could. Nevertheless, as opposed to confronting that reality, people create rationalizations, and they bring down the level of aspirations to remain satisfied with that underperformance.

Stretch is the antithesis of satisfactory underperformance. Stretch means that every individual, in whatever he or she is doing, is trying to do more, rather than less. In that process, each individual is continuously pushing himself or herself. But with that, all of them are also pushing everyone around them, pushing the management, and pushing the organization to do more and to do better.

The first change in context is from constraint to stretch. The second change is from compliance to discipline. The difference between compliance and discipline is subtle yet profound. People comply with something that is external. Discipline, in contrast, is internal, ingrained in the day-to-day behavior of individuals and in all management processes. The absence of the heavy load of compliance does not imply a chaotic situation. Nor does it mean that the organization can have systems or not, but what management does with the systems. Does it use the systems to impose compliance or does it use the systems to instill self-discipline into people’s day-to-day behavior?

Discipline is management by commitment. It implies that everyone does what is promised. It is, however, more than just numbers. Self-discipline in people means that if there is a meeting at nine, everybody is in the room at nine. Self-discipline means that even if the management team takes a discussion that one particular member of the team disagrees with, he or she will fully commit to the decision once it is made.

Intel has a norm it calls “constructive confrontation.” The rules are clear: not only is each employee, irrespective of rank, allowed to talk on any topic that affects her, she is obliged to express her views and argue for them as strongly as she can. At the same time, at the end of any meeting, a decision will be taken and, at that point of time, agree or disagree, but commit. That is the context of discipline.

Third, the behavioral context of high-performance organizations replaces control with support. As opposed to the perception that bosses exist to control and to ensure that people do not do the wrong things, you achieve a genuine change in behavior when bottom-line workers really believe that their bosses only exist for one reason and one reason alone–to help them win. To help them win by personal coaching, guidance, and mentoring; to help them win by helping them gain access to resources to the rest of the organization that they themselves may not have access to, but, ultimately, to help them win. That creates the context of support. Workshops and frequent reviews provide support and help improve discipline. Intense and frequent peer-based reviews of commitments lead to candor and honesty in interactions and, ultimately, help people develop a sense of accountability.

Finally, there is the shift from contract to trust. Not just as the contractual, instrumental version of trust that says, “If you and I can come to a deal, I trust that you will keep your side of the deal.” A real feeling of trust is much more that that; it says, “You know, you are a part of the same organization, and I trust you. I trust you from day one, unless your prove yourself untrustworthy at a later point.”

From Context to Behavior

A combination of stretch, on the one hand, and discipline, on the other, creates the basis for distributed entrepreneurship. Just stretch without discipline–a great ambitious vision of the future without the capacity for efficient, methodical execution in the present–can be very dangerous. It can make management float out into the sky, like a hot-air balloon, never to land back in reality again.

Many organizations have paid dearly for such daydreaming ambition that is not counterbalanced by a sharp sense of discipline. Similarly, discipline without stretch, can be corrosive. Over time, it can destroy all sense of excitement within the organization, all sense of fun and joy. But combine the two–the yin of stretch and the yang of discipline–and then, out of the tension between the two, arise individual initiative and a fundamental spirit of entrepreneurship at all levels of the organizations.

Every organization is trying to get more collaboration from cross-functional teams, working at the plant level, all the way to collaboration across divisional presidents in the corporate executive committee. It seems that it is hard to achieve a kind of spontaneous and voluntary collaboration they need. Dr. Yoshio Maruta of Japan’s Kao Corporation describes such collaboration as biological self-control, “If your finger gets cut, every organ in your body that can provide any support to it would automatically do so, immediately. That is what is needed in an organization.”

How do you get quality of collaboration in a complex organization? This is accomplished by combining support and trust. How do you get learning? It is the tension between stretch and support. The point is simple: if you wish to see initiative, collaboration, commitment, and learning, the challenge is to create a “smell of the place” built on the norms of stretch, discipline, trust, and support.

It is, however, difficult because many leaders find it hard to delegate responsibility and accountability until they have the confidence that those they are delegating to have both the competence and the commitment to take the organization forward. At the heart of their resistance is a profound loyalty to the organization and a great deal of pride in how they have struggled to get the organization at a high level. Some organizations, therefore, are changing the top-down hierarchical organization to a more open, entrepreneurial and professional orientation. Conclusion: top-level managers cannot let go until they feel that people are ready; people find it hard to be ready until the leadership is able to let go.

Very simple questions to the staff show what they think to be important. Responses most of the time concentrate on the following points:

• Informal atmosphere

People like to have contact with senior managers including the chairman to walk through the offices and have contact with them.

• Concern for people

An open-door policy is very much appreciated.

• Large responsibilities

Employees like to be fully kept informed about the performance of the organization and their personal performance.

• Equity

Information needs to be shared freely through a regular and active communication program. Status symbols, such as large cars and over-seized offices are not very appreciated.

• 5) Ownership

People like to see themselves not as employees or the organization as an employer. They want to feel that the organization belongs to them as they belong to the organization.

• Personal development

A process of training and development along with commitment to merit and reluctance to hire laterals creates some unique opportunities.

• No politics

People appreciate very little politicking.

Transforming the Organization’s Philosophy

The most important challenge facing managers is a little abstract: the need to change their basic management philosophy. Yes, they need specific changes in strategy, organization, and individual behaviors. However, to make such radical and simultaneous changes across all these different fronts, they have to change the lens through which they view the organization and the premises on which they frame their own managerial responsibilities.

Beyond Strategy, Structure Systems to Purpose, Process, People

The current generation of leaders has learned to frame their tasks through the viewfinder of the three Ss: crafting Strategy, designing Structure, and locking both in place with supporting Systems.

This strategy-structure-systems oriented management doctrine had emerged in the United States, through the pioneering experiments of Alfred Sloan at General Motors and, in its time, it was a revolutionary discovery. Based on the delegation of responsibility to a new level of divisional general managers, this new practice was made possible by the development of sophisticated planning and information systems that allowed those at the corporate level to maintain control over their diverse set of decentralized operations. For decades, it served organizations very well. In contrast to the earlier model of a functional organization, this new doctrine and the divisional organization that embodied it had a much greater capacity of complexity. Its modular design supported vertical and horizontal integration–the wave of conglomerate diversification in the 1960s and the start of globalization in the 1970s and 1980s. To get into a new business, all the organization had to do was to add a new division. To go to a new geographic area, ditto.

Stimulated by the enormous success of its pioneers, this strategy-structure-systems doctrine soon spread around the world. Structure follows strategy, it claimed. Moreover, systems support structure. Within two decades, these aphorisms deeply penetrated management thinking. With system, we mean a living, developing, and changing flexible organism.

All over the world, business schools taught this model. Look at the curriculum of any MBA program and you will see the strategy-structure-systems doctrine. Consultants spread it from organization to organization. Soon, a generation of senior managers comes to the fore when they saw these three powerful tools as the primary levers for establishing the direction and leveraging the performance of companies and organizations. As a result, they defined their own roles as the organization’s designers of strategy, architects of structure, and builders of systems. In a highly restrictive and regulated economy providing discipline and focus on control, the strategy-structure-systems management doctrine suited this context well.

The great power–and fatal flaw–of this doctrine lay in its core objective: to create a management system that would minimize an organization’s reliance on the idiosyncrasies of individuals. If, from the top, the strategy could be clearly defined and communicated; if a clear structure could be established so that everyone knew who reported to them and whom they reported to; and if clear systems could be developed for managing the flows of capital, information and other resources, then complex organization could be run with people as replaceable parts. It would not matter who was in particular job; they would all do the same things, anyway. This is exactly what happened in large organizations in both public and private sectors. From experience, the offices of the UN, specialized agencies on the second floor do not know what the seventh floor is doing and vice versa. Thousands of employees in headquarters are there to serve only a few hundreds of experts in the field. The approach is top-down with the executive secretary in a fancy large office on the top floor, with all kind of diplomatic and other immunities and facilities.

Over the 1990’s, the world economy and the Indian approach have undergone some profound changes that have undermined the foundations of this strategy-structure-systems doctrine. Overcapacity and intense competition are the norm in most organizations. The lines separating organizations have blurred as technologies and markets have converged, creating new growth opportunities at the intersection of traditional organizations. Most notably, ideas and knowledge have increasingly replaced capital as the scarce resource and key source of competitive advantage.

In this new world–a world in which an internet portal has an enormous market and educational value; in which swirling competition outdates established structures overnight; and in which hiring an excellent manager of science can often be a far greater triumph than the bagging of a big bank loan–the strategy-structure-systems model has become obsolete.

In the emerging knowledge and service-incentive economy, the key challenge is not to establish control over people so as to run an organization as it were a machine; it is to be able to attract, develop and retain the best talent and to link, diffuse and leverage their knowledge, skills and initiative to create innovations and new opportunities. In this economy, the old doctrine, the managerial equivalent of Taylorism, has become to an abrupt dead end.

What is special about modern organizations: a different management philosophy? Many managers have recognized the limitations of the strategy-structure-systems doctrine but lacked either the imagination or the courage to break free from it. In contrast, modern organizations have adapted a fundamentally different management approach.

Instead of trying to be the designers of strategy, these new managers took on the role of establishing a sense of purpose within the company, defined in terms of how the company will create value for all its constituents, and strategy emerged within their organizations, from the energy and alignment created by that sense of purpose. As opposed to constantly playing with the boxes and lines that represented their organization’s formal structure, they focused on building core organizational processes that would support entrepreneurship of front-line managers, integrate the recourses and knowledge across the front-line units to develop new capabilities, and create the stretch and sense of challenge that would drive the whole organization into continuously striving for renewal through new value creation.

Instead of being builders of systems, they took on the role of being the developers of people, creating a context in which each individual in the organization could become the best he or she could be. In essence, they replace the three S’s of Strategy, Structure, Systems with the three P’s of Purpose, Process, People, both as the philosophical core of the company and as the key anchors for their own roles and tasks within the organization.

It is important to emphasize that this new philosophy does not imply a complete rejection of the old doctrine. Therefore, this chapter is not titled as “from” strategy, structure, systems but “beyond” it, to purpose, process, people. Clearly also modern organizations have a strategy, have a clearly defined structure, and have effective systems. The vital difference is that modern managers have extended their focus beyond the hard-edged tools of strategy, structure and systems to embrace the softer more dynamic model that we can define as the purpose-process-people philosophy. This fundamental difference in philosophy defines the essence of what is distinct about these organizations, and what they have proposed while many have stumbled.

Although this change in philosophy to a new model pervades the entire organization, it’s starting point rest with top management. It is their managers who have to lead their organization’s transition, beyond strategy to purpose, beyond structure to processes, and beyond systems to people.

Beyond Strategy to Purpose

For any chief executive, the idea of being the organization’s omniscient strategist is hard to resist. Strategy is every appealing concept, both intellectually and emotionally, and the business press is always full of stories of how exceptional consultants saved companies through their personal redirection of strategy, constantly reinforcing the heroic image of the consultant as an army general, sitting on the proverbial horse, thinking up great strategies and leading his troop to victory in the battlefield.

When organizations were smaller and less diversified and their operating environment was simpler and more predictable, the ability of those at the top to set a clear strategic agenda was much more feasible. As companies grew larger and their operating environment became more complex, senior executives needed elaborate systems and specialized staff to ensure that they could review, influence and approve the plans and proposals of their divisions and operating units.

The problem is rarely the consultant personally, but rather the assumption that the consultant should be the chief strategist, assuming full control of setting the organization’s objectives and determining its priorities. In an operating environment where the fast-changing knowledge and expertise required to make such decisions are usually found at the front lines of each organization, this assumption is untenable. Strategic information cannot be relayed to the top without becoming severely diluted, distorted and delayed. Even when it does survive that tortuous journey in some useful form, top-level executives rarely have the current knowledge, the specialized expertise or the fine-grained insight often required to sort out the complex decisions and make the sophisticated judgments implied by the strategic proposals.

Most top-level managers find the notion of “softening the strategic focus at the top” very hard to accept. They fear that it would make them appear indecisive or even incompetent. They fear that unless they provide a clear strategic direction, they may lose the respect and admiration of employees. Though they continue their efforts to play the role of the strategic guru, adopting sterile planning and control processes and mechanical, simple-minded incentive systems to drive strategy top-down, further eroding the motivation of the people.

In such an environment, in which people no longer know–or even care–what or why their companies are, leaders cannot focus only on refinements to the analytical logic that frames the strategic processes. Strategies can engender strong, enduring emotional attachments only when they are part of a broader organizational purpose. Today, the corporate leaders’ greatest challenge is to create a sense of meaning with which the company’s employees can identify and in which they share the feeling of pride.

What does it take to create a sense of purpose? One key element is to establish a share ambition or vision. Growth certainly is not the only form of shared ambition. One also can establish a profound sense of purpose by focusing everyone’s attention on an important social need, e.g. in India to solve the crippling housing problem. Helping middle-class Indians own a home was innately a wholesome goal, one to which employees could relate with a sense of pride and satisfaction. This sense of mission can be tapped in every individual by building up a customer- service orientation on the strength of this link between the organization’s ambition and each individual’s need for meaning in his or her own work.

A shared ambition is not enough to create a sense of purpose. It is not enough to define what the organizational aims are. To create purpose, it is equally important to also shape and embed in the organization a set of shared values, a description of what kind of organization it wants to be.

Objectives and strategies do not get you there, values and people do. First define a set of values and those values then determine who would be on the management team. People are loyal to a set of values they believe in and find satisfying. Beliefs and values give a common cause and a sense of purpose across the organizations. To meet the challenges of the future, people are prepared to change everything about themselves except their beliefs, as they alone, guide, govern, and bind them together as an organization.

For many companies in developing countries, values are the Achilles heel. Stimulated by an environment that was simultaneously inefficient and corrupt, they have developed terrible values that are now deeply entrenched in the psyche of their people. What one does outside reflects inside: arrogance, cutting corners, “managing the environment,” lack of respect for the individual dignity, one’s own and others’- large numbers of companies and organizations are still ridden with the bad habits of yesteryears. They cannot establish a sense of purpose, irrespective of how exciting and well crafted their vision statement might be, unless they take determined action to purge themselves of those debilitating values.

Finally, for the purpose to become an active management process at all levels of the organization, it is necessary to bring the vision and values down to the level of each individual. They have to be translated so that “each stonecutter can see his or her job as part of the building of a temple.” It is through such translation to the individual level that an organizational purpose becomes the source of personal identity and meaning for employees, and the basis for the kind of behavior and actions needed.

Beyond Structure to Processes

Perhaps even more than strategy, structure is a highly seductive lever for top-level managers, and most of them see their control over the organization’s structural configuration as a powerful tool to shape the broad direction of the organization and to influence the actions of managers lower down the hierarchy. As organizations become larger, this top-level preoccupation with structure leads to complex organizations with multiple layers and increasingly bewildering management processes.

This is precisely what happened to large organizations and companies all over the world, as the strategy-structure-systems doctrine diffused from the United States to Europe, then to Asia and other continents. By the mid-80s, they began confronting severe problems that were caused by the weight and elaborateness of their complex structures.

Over the 1980’s, big companies around the world started falling off the principle–IBM, Kodak, General Motors, and Sears in the United States; Philips, Siemens, ICI, and Daimler-Benz in Europe; Matsushita, Hitachi, Mitsubishi, and the Industrial Bank in Japan, and so on. In each case, one could find an explanation for their stumbling in some specific technological or market factors, but the underlying causes were the same across the board. They all had fallen victim to the problems of strategic stagnation and managerial myopia caused by their increasingly complex organization. Stifling bureaucracy at the corporate level had crushed their entrepreneurial spirit, fragmentation and compartmentalization of the divisions inhibited knowledge diffusion and organizational learning across them, and the hierarchical relationships that were designed to achieve order, efficiency and control had destroyed their capacity for change and renewal.

The management recognized the limitations and constraints of the structural solution that had triggered the decade-long flurry of de-layering, de-staffing and downsizing in organization around the world, to dismantle their bloated and overly complex structures. As they had simplified their organization, managers have found a completely different way to think about their organizations, in terms of processes rather than structures.

The shift from structure to processes as the primary organizing device was initially built around agendas such as TQM, time to market, and supply chain management, which all focused on horizontal processes cutting across the organization rather that the vertical processes of command and control that lay at the heart of the structural thinking. The gradual shift finally became a tidal wave as the process-engineering movement swept through the corporate world in the mid 90s.

In the best organizations, managing has been focused on developing processes rather than elaborating structures, to concentrate on how the organization would create value instead of how top management could enforce control. This focus on processes is manifest in these companies at many different levels. All of them have significantly improved their operational processes–how to pay bills, for example, or how to assemble a part in the factory–by redesigning the work flow, often with support from new IT-mediated methods. One level above, we can see how they have reshaped their strategic processes, such as new product introduction, the logistics chain or customer engagement process, by questioning and changing some fundamental aspects of their historical ways of working. One level above still, they have built their overall organizations on three core processes: an entrepreneurial process to drive the externally oriented opportunity-seeking behavior of their organizations; an integration process to link and leverage their diverse resources and competencies lodged in different business, regional or functional areas, and a renewal process to constantly challenge the existing ways, to prevent past success formula from ossifying into a recipe for a future disaster.

An organization’s belief in these processes has some self-fulfilling characteristics. A belief in the entrepreneurial process assumes that individuals lower down the organization can take initiatives, and it creates the context and mechanisms that encourage and enable them to do so. The integration process both assumes and shapes the environment of collaborative behavior, based on trust and a sense of support. The renewal process capitalizes on the natural human motivation to learn and to stretch themselves and creates the resources and tools that people need to engage these inclinations and capabilities.

This broad focus, beyond structure to processes, is accompanied by a changing concept of what an organization is. A focus on structure is built around the concept of an organization as a portfolio of activities and tasks. Organizing then becomes all about breaking up the activities into sub-activities, and then reconnecting them–a very engineering mindset. In contrast, a focus on the entrepreneurial, integration and renewal processes leads managers to view an organization not just as a portfolio of activities but as a social system built on the roles people play, and the relationships that connect them. The focus on processes has been shaped by a fundamental redefinition of management roles within the organization.

The front-line organizational managers’ roles are transformed from that of operational implementers to entrepreneurial spark plugs: they spearhead the entrepreneurial process, supported by the coaching role of senior managers and the framework building role of top-level managers. Beyond this support role in the entrepreneurial process, the senior managers in the middle act as the lynchpins in the integration process, linking the front-line initiatives into coherent strategic thrusts and leveraging the organization’s competencies by transferring best practices and sharing and coordinating the use of resources. Finally, the corporate leaders drive the renewal process, establishing stretch goals and performance standards, shaping the vision and values of the organization, and constantly challenging the organization to prevent ossification and to maintain the performance momentum.

Beyond Systems to People

This means a fundamentally different organizational model. We already have argued that the whole strategy-structure-systems doctrine was developed to free the organization from the uncertainties of human idiosyncrasy–to make people like replaceable parts. Of all the three elements of this doctrine, systems played the most important role in making people’s behavior as if they were like the machines they worked on.

While top-level managers see systems–planning systems, budgeting systems, control systems, and so on–as the lifelines that provide their information link to the operations, to people in the operating units the same systems feel like ropes that bind them, chains that tug them to heel when problems arise, and as puppet strings that control their actions from above. As a result, of the three S’s, it is systems that have perhaps made the greatest contribution in creating in the front-line units of large companies and organizations an internal context.

Besides this consequence of demotivating and disempowering people, the elaborate infrastructures of systems have led to another set of debilitating problems in large organizations. First, there is the enormous cost of preparing, transmitting, consolidating and reviewing a growing array of reports in each of the scores of systems most organizations have developed. This has been largely responsible for the expanding bureaucracy organizations have suffered from.

Equally important, the timelines of most reporting systems are increasingly out of touch with the need of the businesses. Plans and reports prepared on annual, quarterly, or even monthly basis are of limited value in monitoring the activities of a business where important strategic events and operating developments often occur weekly or even daily. To be effective, systems need a relatively stable environment, and they become not only valueless but also counterproductive in a world of rapid changes in competitive, technological, and market conditions.

These limitations of a systems-oriented model have led to one of the most widespread management fads on the 1990’s–employee empowerment. Promoted by management gurus and packaged by consultants, this term encompassed anything from simple introduction of an employee suggestion scheme to the implementation of a radical restructuring of the organization around self-managed teams. While some of these initiatives have been carefully constructed so as to respond to the new realities, many more have paid mere lip service to this deceptively simple and appealing notion. For many overloaded senior managers, struggling with issues and challenges they could not fully grasp, the idea of pushing the backlog of problems back down into the organization had great appeal. Under the sanctioned umbrella of “empowerment,” many have handed over responsibilities and delegated decisions so broadly, so quickly, and with so little support, that the process can be better described as “abandonment.”

Managers more and more discover that people are the most important source of competitive advantage. Their actions, demolishes the core tenet of the strategy-structure-system doctrine which instructs managers to minimize risk by controlling the idiosyncrasies of individuals. In the new management model emerging all over the world, chief executives recognize that the diversity of human skills and the unpredictability of the human spirit make initiative, creativity and entrepreneurship possible. The most basic task of corporate leaders is to recapture these valuable human attributes and to do so, they need to abandon the constraining strategy-structure-systems doctrine and embrace the liberating philosophy of purpose, processes, and people. “People” is crucial for a learner-centered university.

Creating Value for Society

The question is, “What did the new managers start with?” What is it about them that led them to this very different management approach? In fact, they cannot copy anyone; their beliefs and practices came from within themselves. What was it within them that manifested itself in this very different corporate philosophy?

The ultimate source of this new doctrine lay in their very different assumptions about their work, and about what an organization is supposed to be. The strategy-structure-systems doctrine is based on a narrow economic view of organizations and an instrumental perspective on organization’s role within the broader society. This view is grounded in a more moral and institutional perspective.

The concept of strategy, for example, is built on the premise that corporate management’s primary objective is to appropriate value for itself. Nowhere is this premise stated more clearly than in Michael Porter’s theory of competitive strategy that has had such profound influence on management thinking around the world. Organizations are seen by Porter as positioned in the middle of a set of competitive forces that pit them against all others. Organizations strive to keep as much as possible of the value embodied in their products and services for themselves, and allow as little as possible to fall into the hands of employees, customers, and suppliers and direct or potential competitors, who are all trying to do the same. In short, strategy is about preventing others from eating your lunch.

The difficulty is that in this view, the interests of the organization are fundamentally incompatible with those of society. For society, the freer the competition is among organizations, the better. For individual firms, the purpose of strategy is to restrict the play of competition to keep maximum value for them. To do their job of increasing corporate profits, managers must prevent free competition, at the cost of social welfare. The destruction of social welfare is not just a consequence of strategy, it is the fundamental objective of profit-seeking firms and, therefore, of their managers.

This view of the interests of the organization and those of the broader society being fundamentally in conflict does not square with the realities of modern economies. The last hundred years have seen an uninterrupted and unprecedented improvement in the quality of human life, due in a large measure to the ability of organizations to continuously improve their productivity and their talent for innovating new products and services. Most of the economic value in both developed and developing economies is created not through the economists’ ideal of highly fragmented, but within efficient, well-functioning organizations involving teams of people acting collectively, coordinated by the broader purpose of the total organization.

Most organizations that prosper do not do so by merely appropriating value, at the cost of social welfare. Rather, in healthy economies, vigorous organizations coexist with intensely competitive markets in a state of creative tension with one another, each contributing to economic progress, but in different ways. Organizations create new values for society by continuously creating new products and services, by finding better ways to make and offer existing ones; markets, on the other hand, relentlessly force the same organizations and companies to surrender, over time, most of the value to others. In this symbiotic coexistence, companies and markets jointly drive the process of creative destruction that the Australian economist Joseph Schumpeter showed to be the engine of economic progress.

The problem with the strategy-structure-systems doctrine is that it focuses management attention on static rather than dynamic efficiencies. Static efficiency is all about exploiting available economic options as efficiently as possible–making the existing system more efficient. Dynamic efficiency comes from innovations and improvements that create new options altogether–moving the system to a higher level. When the source of value is considered secure, any consideration of–Who gets what?–must be a zero-sum game in which profits can only come at the cost of someone. In sharp contrast, Schumpeter’s very different view on the role of organizations focuses on the dynamics of how the pie gets bigger in a positive sum game in which there is more for all to share. In this view, instead of merely appropriating value, organizations serve as society’s main engine of discovery; they progress by continuously creating new value out of the society’s resource endowments, thus stimulating both social and economic progress.

Neither of the new managers engaged in the old and tired debate about the social responsibility of business, which frames social responsibility as something outside of business. Instead, they put value creation for society at the heart of their business. Out of this conviction about the role of organizations and companies emerged the very different management philosophy that has powered their organizations not only to the prosperity they now enjoy, but also to the prestige and legitimacy that the international community accords to them.

Regaining Legitimacy

Over the twentieth century, companies and organizations have earned enormous amount of social legitimacy, which has been both cause and a consequence of their collective success. Amid a general decline of other institutions–think of the state, political parties, organized religion, and even the family–the business firm has emerged as perhaps the most influential institution of modern society.

Yet, in the closing decades of the century, organization and their managers suffer from a profound social ambivalence. Hero-worshipped by the few, they are deeply distrusted by the many. In movies and television, businesspersons or managers rarely appear, except as villains. When asked by pollsters to rank professionals by their standing in society, people consistently rank managers the lowest-even below politicians and journalists.

Given the powerful and largely positive role companies are playing, this perception is unfair. Yet, the perception exists, and some visible misdeeds recently discovered in the United States serve to give this perception its ascendancy and to make potentially one of the greatest risks that companies face today. There is a clear lesson from history–institutions decline when they lose their social legitimacy. In Holland, Ahold has been a bad example of this. This is what will happen to companies unless managers accord the same priority to the collective task of rebuilding the credibility and legitimacy of their institutions as they do to the individual task of enhancing their organizations’ performance.

Far from thinking that their organizations are agents for destroying social welfare, most of the managers believe that their primary role is to create value. Their guilt lies in their unwillingness to confront explicitly the role that their organizations play in society or to articulate a moral philosophy for their own profession. Through this act of omission, they have left others–economists, politicians, journalists, etc.–to define the normative order that shapes public perceptions about themselves and their institutions. Those perceptions, in turn, have seduced many managers into thinking about their organizations in very narrow terms, in the process, have made them unconscious victims of the value appropriation logic and weakened their ability to create new value for society.

There certainly are high-level management directors who will earn their places in the history of business. Not always because of the economic performance of their organizations while they were in saddle because hundreds of managers achieve that routinely, but because they have wrestled back the initiative to define a new corporate philosophy that explicitly articulates a view of organizations as value-creating institutions of society. In that process, they have also contributed to reestablishing the legitimacy of the management profession as a key contributor to a country’s economic and social progress. Collectively, they are role models demonstrating the spirit, passion, and moral commitment of which entrepreneurs and managers are capable, and which the strategy-structure-systems doctrine has all but destroyed.

The Markel Insurance Company of Richmond, Virginia in the United States is an excellent example of this new philosophy. Its main goal is to keep top-management salaries at a fair-value salary range as well as empowering all of its employees in money management. Management makes sure that every employee is professionally advised in investing a portion of his or her salary for future security. Integrated medicine is taken very seriously. On-site health club membership is provided for all employees, along with a daily supply of free health foods. The Company invests in fine art that is located throughout its buildings for employees to appreciate. Markel gives back to its community by contributing and providing services and educational programs to “at risk” adolescents, as well as many other groups.

Ideas matter. In a practical discipline like management, they matter even more. The philosophical vacuum of the strategy-structure-systems doctrine has caused managers to subvert their own practice, trapping them in a vicious circle. There is a choice. When the solution to a recurring problem is always “try harder,” there is usually something wrong with the terms, not the execution. Therefore, our final advice to managers–when in a hole, the first thing to do is to stop digging. The outlines are emerging of a very different management philosophy, based on a better understanding of both individual and corporate motivation. The time has now come to throw out the old paradigm of management and to make a jump to the new one. Otherwise, the fatal gap between the economic power of companies and their social legitimacy will continue to grow, stunting the growth potential of workers, organizations, and societies.