The principle guiding this exercise was management by objectives (MBO), a tool developed by Peter Drucker, often described as the “founder of modern management". The organization’s goals were broken down into smaller and smaller goals as one went down the pyramid until they reached me, at the bottom of the managerial food chain.
All of us had to define (or were given) our key result areas (KRAs) and set targets, against which we would be judged at the end of the year. The idea was that everyone would thus be aligned to the big picture. Drucker introduced the concepts in his landmark 1954 book The Practice of Management, and MBO and KRAs soon became the warp and weft of management worldwide.
To write this piece, I reached out to my classmates and friends from business school, who have been in the thick of it all for all these years (I dropped out early to graze in lazier pastures). “MBO is gone, KRAs are gone," said a US-based friend who runs his own management consultancy firm.
“Uh, how do companies do annual performance appraisals of employees then?" I asked. “Those appraisals are going extinct," he replied. “So how do they evaluate staff?" I persisted. “A lot of companies use OKR—Google, Microsoft, all the top firms," he said.
I didn’t ask him what OKR was; I would find that out myself. Then my friend said: “What is definitely dead is the Jack Welch way." Jack Welch was crowned by Fortune magazine in 1999 as the “manager of the century". The 20th century.
The VUCA world
As I spoke to more people about management in the 2020s, what emerged is an unprecedented sense of uncertainty. That there are no hard and fast rules for managing businesses any more—no axioms, no sacred commandments. The world has gone “VUCA"—volatile, uncertain, complex and ambiguous. This fundamental shift has upended management practices that were widespread, if not ubiquitous, even a decade ago.
“The hierarchical organization model is finished," my US-based consultant friend told me. “New models are emerging but there is no one dominant model that works for everyone." New times call for new rules. But trouble is that, with the world changing at warp speed, today’s rules may be worthless by sunrise tomorrow. Of the five most valuable companies in the world in 2009, only Microsoft still retains a place in the list. The No. 1 company in 2009, Exxon Mobil, is today No. 17, with a lower market capitalization.
“In the VUCA world, competency comes with an expiry date," says Rajesh Srivastava, management philosopher and author of The New Rules of Business, to be published this month. This is as true for organizations as it is for people.
The jack Welch legacy
Today, it is difficult to imagine the sort of awe and respect that Jack Welch, who led aerospace-to-media conglomerate General Electric Co. (GE) from 1981 to 2001, commanded among managers across the planet for two-and-a-half decades. Under him, GE’s value rose more than 4,000%, making it the world’s most valuable company.
Welch’s most famous management tool was the “vitality curve"—every year, an employee’s performance was boiled down to a number on which they were ranked against peers. The bottom 10% was fired, whatever their absolute score. And this cruel practice was venerated and followed by myriad corporates. In 2015, GE retired the very concept of the annual review. Many of the world’s most successful companies (GE was certainly not in that group any more) had buried it years ago.
Welch worked in an era when Western businesses were under severe pressure from cheap but high-quality Japanese goods. He cut costs brutally, while adopting the perfectionist Six Sigma quality management programme.
But then the global business environment changed. The CEO of one of India’s biggest manufacturing companies told me: “You could now disaggregate the supply chain and spread it across the world and produce what you wanted where you wanted, depending on cost efficiencies." Simultaneously, telecom revolutionized services businesses. Offshoring and outsourcing flourished; the Indian information technology industry grew from $60 million in 1991 to $181 billion in 2018-19.
Drucker and Welch, the two gods of late 20th century management, were consigned to history. “The last two decades of the 20th century were all about cost-efficiencies and building very strong processes," my CEO friend explained. “So you had Total Quality Management, Total Productivity Management, Business Process Re-engineering and so on. It was all about continuous improvement. But after some time, most good companies became pretty much efficient. The focus shifted from costs to revenue."
Crucially, the focus shifted from continuous improvement to innovation and breakthrough improvements. “Build a better product at a lower price" was no longer a sustainable strategy. This is because, in an unpredictable world, past achievements are no longer any guarantee of future success. Everyone accepts that agility, speed of response and adaptability are the most essential qualities to survive and thrive.
The end of hierarchy
I looked up OKR. It stands for objectives and key results. OKR was developed at Intel Corp. in the 1970s by its legendary CEO Andy Grove. John Doerr, today one of Silicon Valley’s most powerful investors, learnt it at Intel as a young engineer. As an early investor in Google, he introduced the founders Larry Page and Sergei Brin to it. Since then, OKR has spread like wildfire.
OKRs differ from MBOs in many key ways. OKRs are monthly or quarterly, while MBOs are annual. MBOs are top-down, OKRs are bottom-up and sideways. While MBOs are pragmatic and risk-averse, in the OKR system, employees are encouraged to set audacious, aggressive and aspirational goals. This also means that it is “OK to fail", provided the “how" of achieving the goals is transparent, collectively committed and verifiable. That’s a big contrast with MBOs, where the “how" is immaterial; only the “what"—the goal—matters.
Most importantly, while MBO decides compensation, OKR is only loosely tied to raises and bonuses. Other factors taken into account depend on the company—for instance, they could be the employee’s impact on the business, the relative scarcity of their skills and market conditions. “OKR works particularly well for teams because it is a peer-driven approach, and allows wide latitude to set targets," a London-based partner in one of the world’s top consultancy firms told me. “And small focused teams are definitely the way forward. In fact the entire organization is being reconceived."
Not company, but ecosystem
For their recently published book Reinventing The Organization, academic Dave Ulrich and Arthur Yeung, adviser at Chinese conglomerate Tencent, studied current stars like Alibaba, Google, Amazon, Facebook and Supercell. Their conclusion is that these companies are “market-oriented ecosystems" (MOEs) comprising independently operating “cells" connected to one another through four “capabilities"—external sensing, customer focus, innovation and agility.
MOEs follow a four-phase mantra: think big, test small, fail fast, learn always. And whatever the fate of a product, knowledge and information is shared with others in the ecosystem about what worked and what didn’t. The manager’s job is not to exert power, but to empower, by giving the employee knowledge, competence and consequent authority. This obviously requires a pretty basic mental shift.
Ulrich and Yeung write exclusively about digital-age firms, led by driven entrepreneurs unencumbered by traditional theory, but many so-called old economy companies are right there at the bleeding edge too. “The line between atom-based and byte-based businesses is blurring," a Singapore-based banker told me. “Name me one successful manufacturing company that doesn’t have infotech at its heart, be it Big Data or artificial intelligence (AI) or robotics or powerful enterprise software." He pointed me to Chinese group Haier, the world’s largest home appliance maker (global market share above 10%). Over the past decade, Haier’s turnover has grown at 18% annually, and gross profits at 23%, figures unmatched by any of its rivals.
Haier has divided itself into more than 4,000 microenterprises (MEs). Of these, about 200 are market-facing units, 50-plus are new businesses and the rest are “node" MEs, which sell component products and services such as design, manufacturing, and human resource support to the market-facing MEs. MEs are free to form and evolve with little central direction, but they all share the same approach to target setting, internal contracting and cross-unit coordination.
Every ME is free to buy services, or not, from other MEs, which have to bid for the contracts. If an ME believes that an external provider would better meet its needs, it can go outside. Nodes that are unable to provide competitive service can and do go out of business. Every node is thus invested in the performance of the market-facing units, and every employee’s pay is linked to market outcomes.
MEs are also open to hostile takeovers. Performance data for all MEs is transparent across the company, so someone who believes they can better manage a struggling ME can make a pitch to its team and, if the pitch is convincing enough, can topple the leader. Also, if an ME repeatedly fails to meet its targets, its members can vote to oust its leader and elect a new one.
Similarly, every new product or service at Haier is developed in the open. Social media is used to ask potential users in great detail about their needs and preferences. The company has assembled a network of 400,000 “solvers"—institutions and technical experts from around the world, so when potential customers demand a new product feature, Haier can post a question on its solver platform on how best to engineer it.
By thus moving its entire product development process online, Haier has reduced the time from concept to market by up to 70%. Manufacturing and design nodes, user MEs, potential customers and business partners work in parallel, starting with the earliest discussions about customer needs. Once a prototype is ready, Haier again uses crowdsourcing for people to buy and use it, and does not launch the product till it has been validated by the users.
In October, journalist Derek Thompson wrote in Theatlantic.com: “If you wake up on a Casper mattress, work out with a Peloton before breakfast, Uber to your desk at a WeWork, order DoorDash for lunch, take a Lyft home, and get dinner through Postmates, you’ve interacted with seven companies that will collectively lose nearly $14 billion this year."
Most of these companies have never announced, and may never achieve, profit. How long can this “millennial lifestyle sponsorship", as Thompson calls it, go on? How long before investors re-dedicate themselves to that old jungle saying: “Profits matter"? Something’s gonna give at some point of time, and it will cause a lot of disruption—both economic and social.
We are heading into greater turbulence. As AI moves deeper into decision-making systems, as robots roll into workplaces, they could throw up a bunch of challenges that we may not have yet foreseen—and we’re already aware of many.
And it’s hardly only technology. The 2020s may see dramatic changes in social (for instance, the rise of Gen Z as a major consuming class), economic (how long before the next big global downturn?), political (a wave of nationalism has been sweeping the globe), environmental (the climate change issue is only going to get more serious) and demographic (ageing populations in very large parts of the world, including China) trends.
The world is only going to get more VUCA in the 2020s. And managers will need to scramble to make sense and cope. And all the new rules will be finger-scrawled on the beach even as the tide comes in.
Sandipan Deb is a former editor of Financial Express, and founder-editor of Open and Swarajya magazines.