LEADING THE NETWORKED ORGANIZATION

Days after the stock market’s first 700-point decline, an acquaintance expressed to me his be- fuddlement with the burgeoning credit crisis. I asked if he had recently withdrawn any money from an ATM not owned by his own bank. “Yes—and they charged me a fee!” he replied indignantly. “But why did the bank give you money? You are not their customer.” He kept quiet. I explained that effectively, the ATM bank loaned his bank the money he took out. “Would they have given you the money if they believed your bank could fail?” I asked. “No,” he slowly replied. 

I am relating this story, with its simplified example of a complex process, to illustrate a basic but often forgotten truth: We live in a world of networked organizations. throughout the 20th century, most organizations functioned in a largely linear world of customers and suppliers. No longer. over the last fifteen years, almost every organization’s work has fragmented across time and space, often crossing national and geographic boundaries that were once inviolate. Consequently, each organization now has direct and indirect links 

to many, many more organizations. this networked world enabled my acquaintance to access his money when far from home. It also played a key—but much underappreciated—role in today’s economic crisis and in other challenges we face. 

Emergence of the Networked Enterprise 

Rramchandran (“Jai”) Jaikumar, the late Harvard Business School professor, produced one of the most brilliant pieces of research ever to come out of business academia. He showed that every few decades, econo- mies undergo transformational—“epochal”—change. When this occurs, companies must change systems, organizational structure, and even behaviors they value. those that do so, thrive, experiencing order-of-magnitude improvements in performance. those that do not, struggle—and may even go bankrupt. For example, the epochal shift now called “Lean enterprise” powered the rise of a wide range of Japanese companies and destroyed many Western companies. American Motors, one of what was then Detroit’s “Big Four,” went bankrupt, while a worried government bailed out Chrysler, believing it “too big to fail.” 

Over the last fifteen years or so, we have experienced an epochal change that has made business networks to- day’s single most important organizational innovation. these networks have the power to reshape not only organizations but also industry dynamics. Consider these examples: 

• In the 1990s, even as it begged everyone not to give up on Macs, apple stayed afloat by buying chips from IBM, components from a few others, and nagging Microsoft to continue producing Mac-compatible office and Internet explorer. today, it has built a network of associated companies that spans six industries: computers, consumer electronics, telephony, music, film, and automobiles. these partners—ranging from music publishers to makers of high-end cars—have a vested interest in assuring apple’s success. and success has accrued in spades: about 50 percent of college students are buying Macs, and many large corporations are considering adopting Macs and iPhones. Indeed, experts feel while its competitors will struggle, apple may survive even a severe re- cession with only a few scrapes and bruises. 
• In the financial world, commercial banks, invest- ment banks, hedge funds, insurance companies, “non-bank banks” (like GM’s lending arm, GMAC), and reinsurance companies used to be relatively independent industries with limited, narrowly defined links with each other. today, almost regardless of where they are located in the world, they are coupled together tightly by a com- plex set of flows of money and information.

Almost every organization’s work has fragmented across time and space. 

• In the auto industry, more than 40 percent of a typical car is designed and almost 70 percent is manufactured by companies whose names do not grace the car’s faceplate. Like apple’s network, companies in this industry are coupled together by flows of money, information, goods, and ideas from around the world. 

A key implication of Jai’s work is this: doctrines of good management that work beautifully in one epoch tend to be inadequate in the next. to appreciate this, consider again the epochal shift now called Lean enterprise. Smart, competent Western managers and executives could readily appreciate the “technologies” that powered it: statistical process control and just-in-time inventory. What many did not appreciate was the fact that deploying these technologies effectively would require massive organizational change. organization structures having to morph as teams—not individual workers—became critical. Jobs of managers also had to be rethought as these teams took on problem-solving tasks managers used to handle. New processes had to be built to link companies tightly to their suppliers. Most onerously, organizational culture and values had to change, for employees needed far greater education and skills to do basic tasks, and companies had to trust (oh, the horrors!) suppliers to deliver components of the right quality at the right time. When Western man- agers failed to make these shifts, their companies failed. Faced with crises, boards of directors stepped in; they delved into operational and tactical issues that usually did not get a hearing in boardrooms, and forced the necessary changes from the top. 

Anyone who thinks I am exaggerating should consider Jack Welch’s tenure as CEO of GE. How is it that the signature issue of the leader of one of the world’s largest companies was not the usual concerns of CEOs— grand strategy, mergers and acquisitions, corporate 

At times of epochal change, senior executives must rethink how work is done. 

diplomacy—but “Lean Sigma”? at times of epochal change, senior executives must rethink how work is done by their organizations. Indeed, Welch’s successor, Jeffrey Immelt, who is presiding over a far more networked company than his predecessor’s, would do better if he addressed this challenge. 

The Fundamental Conundrum of the Networked World 

We have embraced networks with both arms for the benefits they bring—the way they let us pick up money away from home and play a single song from a favorite band while traveling on the subway. However, most organizational leaders have not rethought how strategies, processes, values, analytical tools, organizations, and technologies (and yes, even laws) must change to function effectively within them. this conundrum can adversely affect our organizations—and even our economies—because of two critical facts. 

First, networks have the power to turn small or isolated problems into huge and widespread crises. In the old linear world, good managers could usually figure out how a problem could propagate and set up roadblocks to thwart it. In a network linked by multiple flows of money, information, and goods, if one path is blocked, others are available for the problem to traverse. that is why Lehman Brothers’ problems (lots of bad debt) threatened Goldman Sachs (which had foreseen the crisis and had sold off potential bad debt). that is also 

why the sequential rescue of AIG and Merrill Lynch did not obviate the liquidation of Washington Mutual and that did not eliminate the need for the U.S. government to orchestrate the sale of Wachovia. then, when the crisis took a breather in the United States, financial institutions in europe, far from america’s real estate meltdown, started toppling. this crisis may yet spread further as GMAC’s exposure weakens the already ailing GM (currently seeking to merge with the even weaker Chrysler) and brings down other companies in the auto industry. their failure will spread out to topple the remaining, relatively healthy financial institutions. 

Second, competition today inevitably takes the form of scrimmages among rival networks, rather than focused jousts between solitary competitors. As a result, no company can do well if its network is failing. the U.S. auto industry is a perfect example. For a very long time, it has engaged in an internecine war no less debilitating than a civil war fought with real weapons. as one business school case (meticulously footnoted with references to many media articles) documents, in the name of efficiency, the leaders of its larger companies have ruthlessly cudgeled smaller, less strong members into submission. In contrast, Toyota’s behavior is an exemplar of a belief in the networked world. It has long had a group of experts who help partner companies, equitably sharing with them any financial benefits that result. If you led a small company, to whom would you be more inclined to take your new ideas and even your problems? Is it any wonder that the product development and manufacturing networks of the U.S. auto companies have atrophied, while those of Toyota have become strong? Is it any wonder that the former are struggling for their very existence, while the latter is not?

No company can do well if its network is failing. 

These are not isolated examples. on behalf of the software firm SAP, some time back I designed and led a survey of more than 500 senior executives of big companies in six industries. the results suggested that the vast majority (74 percent) were building networks, though they might not have associated the term with their actions. they used what they regarded as modern managerial policies and technologies that should have made their businesses more effective, but were struggling in this new world. Fully 30–50 percent reported that routine, everyday issues like “changes in customer orders” and “mismatches between expected and actual demand” adversely affected their companies. as in the prior epochs Jai had identified, the doctrines of good management that worked so well in the linear world are far less effective in this one. 

The New Doctrines of Good Management 

How can organizations do better? Based on research (my own and that of others) and on the experience I accumulated on shopfloors and in boardrooms as an academic, a partner-level consultant, and executive officer of a small public company, I formulated four “design Principles” for networked organizations. to test these principles I turned to a handful of companies from around the world, most notably Nokia and Hewlett-Packard. these two were outperforming their competitors by focusing on managing their networks. Both also had the great virtue of not being my clients, which made them great test beds. Would the design Principles resonate with them? they did—and moreover, the companies showed me how they had implemented them. these are the four design Principles: 

1. Embed sense-and-response capabilities in normal plan-and-execute processes. as they now do for quality, organizations must design into everyone’s jobs (plan-and-execute) the ability to detect (sense) problems and react (respond) before small problems become major crises. Great organizations avoid crises; merely good ones manage them well. 

“The bias towards win-lose is the most difficult thing to unwire.” 

1. Adopt strategies that promote collaborative action among network partners. When work is fragmented across multiple organizations separated by time and space, no one can see all aspects of work. Without true win-win relations with network partners, there is no incentive for anyone to help provide the insights others need either to sense or to respond. 
2. Value and nurture organizational learning. Companies must collect, analyze, and share information and knowledge about what works and what does not. Absent such “intelligent knowledge sharing,” they cannot act decisively when collective action is needed. 
3. Deploy technologies that enable intelligent adjustment to major environmental shifts. Information technologies that support these principles do four things: provide visibility, facilitate collaboration, support analysis, and enable mobility. other technologies may be essential to respond to regulatory requirements or the basic running of the business, but will not provide sustainable advantage. 

The four design Principles are deceptively simple; stating them is far easier than adopting them—and applying them day after day. Indeed, the difficulty in implementing the principles gives them their great power. this is as it should be; strategists ranging from Michael Porter to Chan Kim and Renée Mauborgne have noted that great strategy requires lots of things to fit together and work seamlessly. 

So how do you build a networked organization? 

First, recognize that doing so will take time. In pioneering companies like Nokia, HP, and toyota, the effort took about a decade. Without needing to discover the design Principles for themselves and having access to technologies the pioneers did not, others will be able to do so more quickly, but it will still take years. adopting the second principle will take the longest, for people must unlearn lessons taught by most business schools and economics departments about the virtues of hard-edged competition. Indeed, Senior Vice President Jean-Francois Baril, who helped create Nokia’s capabilities, told me, “the bias towards win-lose is the most difficult thing to unwire.” 

Second, recognize that the design Principles are guide- lines for policy, not cookie-cutter templates. Your task is to guide their thoughtful customization in accordance with your organization’s needs. the sidebar “Building the Implementation Plan” lists important questions that will help this effort. 

third, implement the principles focus area by focus area (that is, market by market or strategic unit by strategic unit), not design Principle by design Principle. Why? Because the four principles are mutually reinforcing, and adopting them all in one area will deliver results more quickly. (Conversely, while implementing each principle across an organization will deliver value, sections of the organization many not experience enough benefits quickly enough to maintain enthusiasm.) For more advice on putting the Four design Principles into practice, see the sidebar. 

The Leadership Challenge 

In a possibly apocryphal story, W. Edwards Deming, the doyen of quality, advised Xerox’s then CEO Paul Allaire about the best way to engender single-minded organizational focus on quality: Start every executive officer meeting with a discussion of quality—and leave immediately after the ensuing discussion. 

Today’s leaders must similarly focus their organization on the reality of the networked world. this is crucial since all around us are words, jargon, processes, and structures that will conspire to drag people back toward linearity (for example, “assembly line,” “process flow,” and “supply chain management”). One key step is to create a visual representation of the organization’s network of partners (who provide components and services, create core and supporting technologies, and take products and services to market). In this representation, wherever possible, use real names of companies to make the abstract palpable. Regularly ask people about their networks, and what they are doing to keep these energized. Interrupt presentations on strategy and execution plans and ask, “How will this affect our partners? How do we know?” 

What leaders must watch out for is the danger of turning “the networked organization” into the latest buzz- word. the only way to protect against this is to truly embrace a personal behavioral change, as advocated by Nokia’s current president and CEO, Olli-Pekka Kallasvuo. Kallasvuo took on the top job in 2006, when Jorma Ollila—who oversaw Nokia’s transformation into a networked organization—retired. 

As a part of a Harvard Business Review panel of top executives, published in January 2007, Kallasvuo was asked what he thought was the most important leader- ship quality. He answered: “Humility is a vital quality in a leader, just as it is for a company. Nokia, if it is to continue to prosper . . . has to be humble in the face of complexity . . . [It] can’t be so overconfident as to believe its predictions are the best. Instead, we need to perceive changes as they occur and react the fastest. In a management team, that responsiveness is a product of diversity—managers must humbly accept that their own perspectives need to be broadened by others’” [emphasis added]. 

Kallasvuo’s belief in humility as an essential driver of the ability to sense and respond makes perfect sense. In a networked world, many leaders and many organizations have the power to promote—or thwart— mutually beneficial action. So one can’t arrogantly lord over others and expect them to provide help when help is needed. Before you flip this page, convinced that this would never work in the real world, consider this: between 1995 and 2006, Nokia’s telecommunications revenues and profits each grew over 550 percent organically (that is, without relying on acquisitions). Without hesitation, Nokia executives credit its networked organization approach to business for powering this growth, which happened even though halfway through the period, its industry imploded. that’s a rough annual growth rate of more than 17 percent for over a decade. In comparison, how well did your organization—or your favorite well-managed organization—do?

BUILDING THE IMPLEMENTATION PLAN

The leader of an effort to build a networked organization should customize the application of the four Design Principles by seeking the answers to these questions: 

• In which part of our organization should we start the initiative? Neither the worst-performing units nor the best will typically be good candidates; if the former fail, the organization blacklists the concept, while the latter tend to have a “We’re fine as we are” mentality. 
• Do we have one or more politically and organizationally astute leaders here who can get things done, even in the face of resistance? If not, how will we ensure success? 
• Do we have real, practical issues here that are crying out for a networked approach? A meaningful win in an area that truly helps the organization will generate interest that will drive broader acceptance. 
• Can we implement all four Design Principles here? Normally, implementation should begin with the first principle, move on to the third, and end with the second; the fourth should be adopted as needed to support the others. 
• Do we need a smaller test bed within this part of the organization? If so, is there a self-contained area here that can be the test bed? Will lessons learned there be transferable to other parts of the organization? (For example, an area could serve as a test bed if a major customer is forcing the organization to participate in its own sense-and-respond network. Wal-mart did just that when it asked its major suppliers to become rFiD compliant.) 

Having chosen a part of the organization to work within, answer the following questions: 

• What is our network here? Who are the core members (partners) whose participation is critical? 
• What do we need to sense and respond to? Why? (Too many sense-and-respond points, and your organization will freeze, too few and you will miss key issues.) select issues to focus on by considering the severity of problems and the frequency of their occurrence. 
• What sort of working relations do we have with the key members of our network—transactional and arm’s-length or collaborative and mutually supportive? Would our partners agree with our viewpoint? 
• How would we go about developing win-win relations with them? What do they need from us that they are not get- ting today? Would we give it to them? In return for what? 
• How do we approach learning—do we actively support it among our employees? Do we encourage people to be open to ideas and data that come in from our partners, even if these contradict our beliefs? 
• A network cannot learn and improve unless its members share knowledge and information; do we have policies in place to guide sharing of operating information with outsiders? 
• How do we use technology to give our people (and our partners) visibility into our current situation, needs, and constraints? Do we use tools to ensure that collaboration among far-flung people is as intensive as collaboration among co-located ones? Do we enable ever-better analysis of our world, instead of relying on opinion? How well do we support our internal and external mobile members (one day a week away from home) across all the prior is- sues? Which technologies do we need in this area? Why? The key issue here is that technologies should be chosen to provide the specific capabilities needed. 

Amit S. Mukherjee is the author of “The Spider’s Strategy: Creating Networks to Avert Crisis, Create Change, and Really Get Ahead.” He leads Ishan Advisors, an executive education and strategy consulting company. He has helped develop business, innovation, organizational, and technology strategies for top executives of some of world’s best-known companies in the high-technology, consumer goods, and health care sectors. Visit www.ishanadvisors.com for more information.