Q: Is capitalism doomed?

I originally published this article in January 2011 but it seemed like a good response to this question. The bottom line is that if humanity is going to survive and thrive, we must restructure our economy and society towards decentralized local production.

Good managers run their businesses by the numbers. But imagine for a moment that your business is Earth. As the manager, you’re responsible for hitting your quarterly and long-term targets. These include providing increasing levels of prosperity, health, and happiness for all of Earth’s inhabitants, managing the use of non-renewable resources, and ensuring that future generations of stakeholders thrive. You run a dashboard report and here’s a scan of what you’re working with:

– The human population is forecasted to reach 9 billion, up from 6 billion in just forty years.
– The American middle class, once a driver for economic prosperity, is in rapid decline.
– More than 80% of sewage in developing countries is discharged untreated, polluting rivers, lakes, and water supplies.
Antibiotic resistance is increasing, posing a major threat of new super diseases.
Nearly 70% of the world’s fish stocks are depleted or over-exploited.
– The rate of species extinction is now 100-1,000 times greater than suggested by the fossil records before humans.
– The world is getting hotter, the ocean is 30% more acidic than 260 years ago, and extreme weather events are intensifying.

You stop reading, knowing that you could spend a lifetime just reviewing the statistics. Your own gut (something you’ve come to rely on as a good manager) also tells you something is off. Modern life just doesn’t seem that high functioning for most of those in your home country. Everyone has more technology, more pressure, but less overall happiness. It’s time to take action. What do you do?

Like any good manager, you take the stats and group them into a pattern. As you scan across the many sectors of the Earth’s man-made systems, you notice something suspicious. No matter what the sector – food, water, health, technology, government, finance, entertainment, trade – you notice a consistent trend. Everything follows the same pattern. It looks something like this:

Centralized production occurs where production is owned and controlled by large producers or aggregators of goods and services which are in turn distributed to the market and made available for sale. And therein lies the problem and the solution.

The problem is this: In order to be more efficient, production always becomes more and more centralized. This makes sense. Organizations try to make the most use of their resources. By getting larger and more systematized, they are able to acquire more resources more efficiently, achieve economies of scale, and have a better chance to compete.

However, centralized production is insatiable and can get so large that it becomes a threat to the surrounding system. This threat takes five basic forms.

Centralized Pollutants
Centralized production creates large amounts of pollution in one location. Examples include factory farms (on land and in the sea), dumps, and large-scale factories that spew emissions. Even cities housing millions of people. Economist call these costs “externalities” but they should really call them “internalities” because we all share the cost burden. In addition, when accidents happen, the sheer volume of pollutants has the potential to produce disaster.

De Facto Monopolies
Centralized production creates monopolies (legal or effective) that threaten new innovations and opportunities emerging in the marketplace. Examples include big media, banking, and medical conglomerates that set the rules, engage in insider trading, and generally work to stack the deck in their favor.

Too Big to Fail
Centralized production can get so big in one industry that its collapse can threaten the survival of the entire system. Recent examples include the global housing collapse and subsequent bank bailouts. Or imagine that the oil industry ceased to function and, if it did, how quickly our society would come to a screeching halt.

Lack of Diversity

Over millions of years, the biosphere has demonstrated that diversity is a very, very good thing. Nature always creates diversity because this gives it the highest resiliency. In centralized production, however, monocultures prevail because they enable efficient production. At the same time, these are also susceptible to being wiped out due to disease and other systemic disasters.

High Unemployment
Centralized production is a relentless pursuit of greater efficiency. Because more and more tasks can be automated, there’s less and less need to employ people. Less people employed means less people to buy products and services. Those who control centralized production become incredibly wealthy while the middle class sinks deeper into poverty and debt. Because of continuing and relentless automation,1 there simply are not enough jobs for everyone. Many of those who are able to get jobs are finding that they are making less money than they used to. In fact, an increasingly large percentage of Americans are working at low-wage retail and service jobs.

What’s the solution? Because you’re a wise and seasoned manager, you know that you can’t micro-manage every global decision by trying to centralize control. Instead, you commit to implementing solutions with the highest probability of creating a global environment, where the best possible outcome is most likely to happen, and for the greatest number of people.

You know from experience that efficiency always overpowers effectiveness and that the demands of today always overpower the needs of tomorrow. Therefore, you vow to create a new system where effectiveness is given power over efficiency, and where long-run needs are accounted for and prioritized. In short, you flip the Centralized Production picture around and reveal Dispersed Local Production:

With Dispersed Local Production (DLP), industries composed of widely dispersed, small-scale and intermediate-sized organizations owned by multiple independent operators produce and distribute goods and services within their local and regional markets. In a phrase, “small is beautiful.”

DLP would counterbalance both the manifestations and increasing risks of Centralized Production. Using such a model creates dispersed pollutants that are more manageable in the surrounding environment, stimulates local innovation and adaptation, generates organizations that are too small to cause systemic harm, and maintains the benefits of high diversity.

Dispersed Pollutants
When production is dispersed, it creates dispersed pollutants that are more manageable for the surrounding environment. For example, rather than aggregating sewage into large-scale treatment plants that leak and pose a great risk to oceans and land, in the DLP model, sewage is treated on the premises and recycled back into the local agriculture. Or rather than having large-scale agriculture production that relies on moncultures and pesticides, DLP relies on local, organic agriculture that uses minimal quantities of chemicals.

Innovation and Adaptation
By tilting the playing field in favor of the “small” and “dispersed,” innovation and adaptation can increase. For example, rather than running large-scale, centralized power plants, a DLP model would support the production of decentralized energy plants where power is produced and consumed locally.

Too Small to Cause Systemic Harm
The internet was originally designed as a DLP system. If one node is taken out, this doesn’t threaten the entire system. Compare this to our current banking system. If one large bank fails, this threatens the existence of the entire financial system. Anything that is large enough to pose such a risk should be brought down to a manageable size.

Wild Diversity
Local dispersed production can unleash new levels of diversity, regional flavors, and nuances that are being lost in today’s homogenized global environment. Let diversity reign in every system, from education to healthcare. Diversity creates resiliency and unlocks new innovations.

Engaged Employment
One of the classic paradoxes of the centralized production system is that many workers tend to feel disengaged from the products and services they create. Imagine the alienation of a shoe factory worker who adds laces to shoes that are shipped off around the world for someone else to wear. Now image the engaged employment of a cobbler who makes a complete pair of shoes that is sold to her neighbors.

As Earth’s manager, how do you create DLP? The best course of action is to create universal incentives for engaging in DLP and repercussions for continuing in the status quo. One obvious place to begin is the current tax code. As Earth’s manager, you decide to make a clear distinction between Private Wealth and Common Wealth.

Private Wealth is that which is created by individual and collective labor – things like businesses, investments, and salaries. Common Wealth is that which is provided by nature. Things like air, water, land, and natural resources. You realize that the efficiency principle operating within centralized production is powerful, but that it doesn’t capture the full cost to the Common Wealth. So instead, you decide to shift the tax basis, which today is calculated on Private Wealth, and instead calculate it based on pollution into the Common Wealth. This doesn’t mean that more taxes will be paid, but rather that more effective taxes will be paid.

Using this model, an operator who still chose to have large-scale centralized production could do so as long as it was able to pay the tax for polluting the Common Wealth. It would not have to pay taxes on “good” things such as jobs, income, buildings, homes, sales, or capital. Instead, those taxes would shift to “bad” things such as waste, pollution, and over-extraction of the Common Wealth. This shift in taxes would offer the incentives and penalties to create a world that is effective as well as efficient and that is successful in both the short run and the long run.

And although the challenges facing the world are immense, practical solutions do exist. As Peter Drucker eloquently put it, in the 20th century, “We packed into every decade as much ‘history’ as one usually finds in a century; and little of it was ‘benign.’ Yet most of this world, and especially the developed world, somehow managed not only to recover from the catastrophes again and again but to regain direction and momentum – economic, social, even political. The main reason was that ordinary people, people running the every day concerns of business and institutions, took responsibility and kept on building for tomorrow while all around them the world came crashing down.” And now it’s up to you and me.

To our success!


1 The existing belief among most economists is that technical innovation creates disruptions that ultimately lead to more growth and more employment. For example, the accountant who loses his job because it can be done more quickly and cheaply by outsourcing does so temporarily. According to this narrative, as the overall global economy improves, that accountant can be retrained for a better, higher-paying job. Exponential improvements in automation, computers, and artificial intelligence, however, are now making this belief suspect. We must accept that, over the coming decades, there will be very few jobs that a normal human can do (professional, artistic, or otherwise) that a machine will not be able to do in better, faster, and cheaper ways. Check out http://www.thelightsinthetunnel.com for more information.

The Happy High Achievers

If you're like most high achievers, real happiness remains elusive.

Are you happy in your job? The data says you’re probably not. I can also speak from experience. For most of my life, I operated under a false assumption that the more successful I became, the more happiness I’d feel. But what I found was just the opposite. At one point in my early thirties, I had the experience of attaining everything I had once dreamed of. But instead of feeling elated and happy, I felt burdened, stressed, and beaten down by constant and competing demands. In my experience in the Young President’s Association, a worldwide group of successful CEOs, I found that very few were actually genuinely happy as well.

Why is this? Why doesn’t greater success seem to lead to greater happiness? There’s an interesting study on success and happiness by Dr. Vance Caesar of the Caesar Group that sheds some light on this phenomenon. In an ongoing study of high achievers (the top 2-3 percent of individuals in a given field) across all walks of life, Dr. Caesar discovered this: Only 1 out of 10 high achievers (.2 to .3 percent of the total pool) rate themselves as authentically happy. Imagine that: If you gather ten thousand top achievers from all walks of life—the rich, the famous, the talented—only a handful will actually consider themselves happy.

What’s the difference between a happy high achiever and the rest? In his research, Dr. Caesar identifies eight attributes that dictate both success and happiness. Most of these are fairly easy to recognize and intuitively make sense. They include a driving sense of purpose, a compelling vision, and the intrinsic feeling that your work is meaningful. Other attributes include beliefs and behaviors that create inner peace, a regular process involving the three Rs (review, renewal, and recommitment), and outstanding discipline. Additionally, happy high achievers generally work with mentors and coaches.

It turns out that one of the secrets of the top of the top—the tiny fraction that is both successful and happy—is that they mastered the game of energy management to such a point that they get more than they give from all of their key relationships. That may sound confusing at first so allow me to explain.

As we’ve discussed, everything is a system and every system exists in relationship to other systems. What happy high achievers recognize is that everything in life is ultimately an exchange of energy. After our health, the single greatest factor that energizes us or depletes us is the quality of our closest relationships. If you’ve ever been in a “vampire” relationship that sucks all the energy out of you, you know it can take days to recover from even a brief encounter. On the other hand, if you have a best friend who always seems to make you feel better, then even a brief encounter can float you higher for days. Recognizing this, happy high achievers make a conscious effort to establish and nurture energizing relationships.

Successful relationships are a two-way street. In an ineffective relationship, one or both parties experience the feeling of giving more energy than they get back. For example, a marriage where one partner feels she is constantly giving more than getting creates resentment. Over time, that resentment builds up and she says, “I’m leaving you because my needs aren’t being met.” In a business setting, the employee who feels he is continually giving more to the company than he is getting in return will soon become bitter and burned out, with either an ulcer or a new job search on the horizon.

On the other hand, a highly effective relationship is one where both parties are able to give each other what they need in a way that adds to their own energy. For example, a marriage where it’s easy (i.e., there is a low cost of energy) for both partners to meet the needs of the other and both partners feel their needs are met is a highly successful union. The relationship “just works.” In a business setting, you’ll find a great mutual fit when an employee feels she is getting more from her job than giving to it, and her managers feel they are getting more from her than they’re giving in total compensation. The employee is thinking, “I can’t believe they pay me to do this. I would do it for free . . . can you believe it?” Similarly, her managers are thinking, “She is one of our top performers. She’s passionate about what she does and delivers outstanding work. I wish I had ten more like her.” The bottom line is that the relationship is net additive, supportive, and energizing to both parties. It just works.

The key differentiator, then, between happy high achievers and the rest is that happy high achievers are extremely vigilant about only allowing relationships into their lives that add to their energy. This includes their marriages as well as their relationships with their families, companies, boards of directors, key staff, and important clients. They make it a point to only allow relationships that are net additive. If a relationship isn’t net additive, it’s no longer one of their primary relationships. It gets shifted or it is gone.

Back to The Success Guide.

Next to Are You Giving More Than You Get in Return?

Where Are Your Energy Drains?

You can't mask underlying energy losses for long. You've got to eliminate them instead.

According to the laws of physics, your success is determined by how you manage energy – and there’s a universal success formula to prove it. Quite simply: success is a function of integration over entropy. Your goal is always to have high integration and low entropy. In “How to Choose the Right Strategy“, I explained how to create high integration in your company. What gets too little attention in business, however, is the havoc that high entropy plays on a system. It truly is the ultimate killer. Or as physicists Sir Arthur Eddington aptly put it in the early 20th century, “The law that entropy always increases holds, I think, the supreme position among the laws of Nature. If someone points out to you that your pet theory of the universe is in disagreement with Maxwell’s equations — then so much the worse for Maxwell’s equations. If it is found to be contradicted by observation — well, these experimentalists do bungle things sometimes. But if your theory is found to be against the second law of thermodynamics I can give you no hope; there is nothing for it but to collapse in deepest humiliation.”

So if there’s anything you should be doing in your business that you’re probably not focused enough on, it’s cultivating an awareness of entropy and a commitment to reducing it. Personally, I didn’t appreciate the significance of entropy in my own business until I ran into it. Hard.

In 1998, at the age of 28, I co-founded an affiliate marketing company in Minnesota and moved it to Santa Barbara, California. By 2001, the company was soaring like a rocket, generating incredible growth rates (much easier to do for a small company than a large one but it’s still a very exciting time), and was adding staff and customers as fast as we could to scale. During this period, everyone who associated with the company, from the staff to the customers and even people on the street, seemed genuinely blown away by its energetic, passionate, and committed culture.

As co-founder and CEO, I would often walk into the office and feel lifted two feet off the floor by the collective energy and enthusiasm of the group. I had installed a giant train whistle on the wall that the sales team would blow every time there was a sale. While the bankers on the second floor weren’t too happy with the frequent “blassssssssssssssssstttttttttttttttttt” of the whistle, we would all cheer loudly. It was a heady and intoxicating time.

Most of us had a feeling that the company had a growing opportunity in front of it and that we had the capabilities to execute on it. It was also relatively easy to make and implement decisions and there was a lot of momentum overall. That all seemed to change in a heartbeat.

During that heady period, I made the decision to hire a professional management team to supplement my own inexperience. “We’re growing really fast and we need experienced hands to help us navigate,” I said. But within two weeks of hiring the “pros,” I walked on that same office floor and, rather than feeling uplifted, I felt a crushing weight. Rather than excitement, momentum, and progress, there was a palpable sense of fear, finger-pointing, and in-fighting in the air. The new leadership had assumed a top-down approach of closed-door decision making that quickly eroded the culture we had worked hard to build.

That extraordinary climate I thought we were building had quickly became a cesspool and all the momentum was gone. The friction within the system had become so high that the ability to maintain the system, make decisions, and get work done became very low. I was dumbfounded, confused, and afraid. “What is going on and how do I fix it?”, I asked myself. I didn’t know it then but I had run up against the classic laws of physics. I did understand, however, that if I didn’t fix it fast, my company was going to fail.

Thankfully, this mini-crisis was a wake-up call. Through a series of steps and some outstanding guidance, I was able to realign the organization, reduce the internal entropy, and accelerate its performance. Today, the company is the world’s largest affiliate marketing company, CJ.com. If we hadn’t dealt with the growing entropy, it would have been just another startup failure.

“Sniff” Out the Drains

In business and in life, ignore energy drains at your peril.

Now that you’re aware of the principles of success, make it a habit to regularly sniff out and eliminate energy drains in your life and work. Energy drains are a symptom of entropy. Energy gains are a symptom of integration. Your goal is to keep the gains high and the drains low.

Energy flows from inside out so begin with you. How’s your physical, mental and emotional health? Any energy drains? If so, what is causing them and how can you address them? Then move outward to your primary love relationship and key family relationships. How are they? Is there friction or flow? If there’s friction, what is causing it and how might you help to address it? Keep moving outward and look at your company. Where does energy seem to be flowing and where are the energy drains occurring? You do this by walking around observing, asking questions, and listening. When you notice signs of unhealthy entropy, take note. Flow is good. Excessive friction is bad. Remember: your company has a fixed amount of energy and whenever there’s a real drain, it’s stealing from your top-line performance.

For example, you may notice that there seem to be good flow and momentum in the sales process. You can tell because you have satisfied, paying clients who come back and buy more of your product or service. The sales team is motivated and working well together. At the same time, you might notice significant friction and energy drains within engineering. What’s causing this? Is it the people? The process? The structure? A misalignment in vision and values? Whatever the cause, if you want to increase execution speed, you’ll first need to address the drains.

Sometimes energy drains are so significant that they can seem impossible to handle. Maybe the friction with your board is so extreme that trying to address it seems more costly than putting up with it. Or perhaps you’ve lost trust and respect with your co-founder. How do you deal with something that, if it goes badly, could bankrupt the whole company?

Obviously life and work are complicated and each situation is unique. I’m not going to insult your intelligence by telling you that there’s a simple, magical, three-step formula to eliminate every major drain. But change always begins with a shift in perspective. And it’s that greater perspective of the real cost of energy drains and their adverse impact on the system that I’d like you to cultivate. Once you begin to view problems and conflicts as energy drains, you’ll be able to find energy-gaining solutions much more easily.

How you deal with energy drains and maximize top-line integration is the art and science of Organizational Physics. As you study and apply the these principles to your life, work, and relationships, your ability to solve even the most complicated challenges gets better and better. For now, just remember that if you want greater top-line performance, you’ll need to start by identifying the energy drains standing in the way.

Back to The Success Guide.

Next to The Happy High Achievers.

The Misaligned Organization and What to Do About It

In 1993 I was a college student in St. Paul, Minnesota. I drove a twenty-year-old canary yellow Toyota Corolla with bald tires, a broken heater, and a misaligned chassis. Because my spending priorities then were the necessities of college life (pizza, beer, girls, and rent), I never invested in making the car safe to drive.

Navigating that car on the icy roads of thirty-below Minnesota winters required a certain ability to go with the flow. But eventually, my refusal to to replace the tires and align the chassis caught up with me. Driving late one winter night … it’s easy to guess what happened. Wipe out. Crash. Car totaled.

Thankfully, no one was hurt.

I share this story because it’s easy to tell when a car is misaligned. The car squeaks, there’s friction and a loss of power, and it’s difficult to steer where you want to go. Similarly, if you know what to look for, it’s easy to tell when your business is misaligned. If you act early on, you can avoid a crash and even improve performance fast.

What It Means to Have an Aligned Organization

Well after I had sold that old Toyota, I received some more equally important lessons on the value of organizational alignment. In my late twenties to mid-thirties, I personally led two companies into compound annual growth rates (CAGR) exceeding 5,0000% per year. From startup to $4M and $12M in two and four years respectively. While this may be chump change to some entrepreneurs, these periods of rapid growth were priceless learning for me. They also provide a valuable lesson that’s applicable to companies of all sizes and at all lifecycle stages.

The surprising thing is that, in order to get that kind of exponential growth, I didn’t have to fight, cajole, or struggle for years. Instead, the leadership team and I created the right internal and external alignment for growth to occur. Because we got the alignment right, the businesses executed extremely fast. The same lesson holds true for you. If you can get the internal and external alignment right for your business, you’ll dramatically increase its probability of thriving and executing very quickly. I’m not guaranteeing 5,000% CAGR. In fact, I’m not even recommending you try for that — it’s much wiser to shoot for more sustainable rates of growth. But the act of creating alignment is essential to every business. Get it right and your company can execute swiftly and powerfully. Get it wrong and you won’t get back on the growth curve until you do get it right. Alignment is the key.

At the most basic level, “external alignment” means that the company’s unique capabilities are well integrated with growing market opportunities. Basically, the company is in the right place, at the right time, with the right set of capabilities, and “pulled” forward by growing market demand. “Internal alignment” means that the collective organizational mass is headed in the right direction and there’s little internal friction stopping the work from getting done. If external alignment is the train engine that powers growth, then internal alignment are the passenger cars being pulled forward. Your goal is to have a powerful engine with smoothly running cars.

When all of the elements of external and internal alignment come together, you’re going to have a very high probability of catching a fantastic growth wave. Intuitively, this should make a lot of sense. Envision a company with the right strategy and business model for the current market conditions. The core team shares the same vision and values. They all want to end up in the same destination and have the same boundaries on what is and isn’t acceptable behavior. There’s a structure in place that assigns authority and accountability for the work that needs to get done. The team has a sound process to consistently make good decisions and implement them fast. And talented, passionate people are flocking to the organization because they sense an opportunity and are intrinsically motivated by the work that needs to be done. If you had all these things, how could you not be successful?

The Early Signs of Misalignment

Unlike a cheap car, you can’t afford to crash your business into a wall. Don’t wait to realign your company once sales are falling and the market has shifted. You want to be well ahead of that curve. If you’re wise, you’ll pay attention to the early signs of misalignment, and take action immediately to address them. You’ll recognize when it’s time to realign the organization when the company isn’t executing as fast as it needs to. Symptoms may include:

  • The Founder’s Trap – the company can’t seem to scale beyond the founder, resulting in a bottleneck to growth and execution
  • Incomplete priorities – the company can’t say “no” to various opportunities and therefore isn’t committed to a clear and purposeful strategy
  • Amnesia – the company seems to have forgotten what it really is and why it’s really in business
  • Internal friction – the company takes too much energy and effort to make simple decisions and get work done
  • Cash crunch – the company has sales but no profits
  • Loss of innovation – the company no longer innovates but acquires growth by buying other companies
  • Poor team performance – the team isn’t stepping up to the size of the opportunity

How to Align Your Organization

Aligning your organization isn’t something you draw up in isolation and then announce to the team. The greatest plan in the world is only as good at the team-wide commitment to implementing it. You’ll need to follow all the steps of a sound decision-making and implementation process and involve those with authority, power, and influence in the alignment process itself. This usually amounts to you and your core leadership team (5 to 15 people on average) going through the process together. Here’s the 6-Phase process I’ve found most effective in aligning organizations for improved performance. In my experience, depending on the size and complexity of the business, it takes anywhere from one to three months to complete Phases 1 to 5, and double that time to fully integrate those changes in the culture and optimize performance in Phase 6.

Phase 1: Aligning the Strategy

The main thing to keep in mind when it comes to aligning or realigning the organization is that, no matter how bad things may be in the current environment, the organization will still naturally resist any change. So your first step is always to unfreeze, unlock, or drain away any resistance to change. My favorite method for doing this is to get the leadership team off site for 1.5 days and, as part of a strategy session, take a holistic view of the organization. We look at where it currently is on its strategic roadmap, as well as any sources of entropy (friction and potential improvement areas) impacting execution. With a shared recognition of what’s really happening versus what should be happening, the leadership team gets on the same page and commits to finding solutions. The desired outcome from the strategy session is group clarity and commitment to the chosen growth strategy; shared recognition of the 3-5 key burning balls or obstacles and an action plan to address them; greater appreciation for individual management styles and perspectives among the team; and recognition of key issues affecting team performance and how to address them. Armed with this information, awareness, and buy-in, you’re ready for Phase 2.

Phase 2: Aligning the Organizational Structure

The purpose of this stage is to create leadership team recognition and buy-in for the right organizational design to support the chosen growth strategy. Like the stage before it, this stage is best conducted off site with the leadership team and, if done well, takes 1 day to complete. The desired outcome should be group recognition and buy-in for: 1) the role requirements and key performance indicators (KPIs) for each business function; 2) the individuals who will perform each role; 3) the talent gaps in the structure; and 4) the new hire priority sequence. The result is a new organizational structure that best supports the company’s growth strategy.

Phase 3: Aligning the Organizational Management Process

This part of the process doesn’t need to be conducted off site. Instead, it’s really a matter of taking the outcomes (the strategy, KPI’s, and short-range and mid-range goals gathered from the prior two phases) and ensuring that the management team is executing towards them with little hindrance. This usually requires a period of time to gather up the right metrics and to make them easy to report on and measure. It also requires spending some extra time with members of the leadership team to ensure they fully understand and are performing in their new roles. At the same time, the goals for longer-range business development need to be managed and tracked through a separate process. Basically, there’s one process to execute on short-range tasks (which is handled during weekly Leadership Team meetings) and one process to execute on long-range business development (which is handled by a Company Council). In other words, don’t attempt to manage long-range goals in a short-range setting. The combined result is better team-wide decision making, an improved capacity to prioritize in the face of change, and more rapid implementations.

Phase 4: Aligning Budgets, Targets, and Rewards

Phase 4 really goes hand in hand with Phase 3. Based on the new strategy, structure, and roles, you’re working with the leadership team to identify the budget and annual, quarterly, and monthly financial and operational targets for the business. The result is greater clarity and incentives for the entire organization, as well as a methodology to track financial and operational performance.

Phase 5: Aligning the Vision, Values, and People

While the the prior phases equip the senior leadership team for success, this phase integrates that groundwork throughout the rest of the organization. You accomplish this by collaborating with the leadership team to help cascade the strategy, vision, values, roles, and expectations down to the rest of the company. The desired outcome is a shared understanding of everyone’s role in shaping the company’s success, vision, and values. The result is a strong organizational culture that supports overall momentum and accomplishment.

Phase 6: Optimization

From here on, until it’s time to realign the organization again, it’s a matter of optimizing overall company performance. The not-so-ironic thing is that, because you’ve invested the time and energy in getting the alignment right, you don’t have to optimize much at all. The ball starts rolling downhill under its own inertia. The outcome is a higher performing, more resilient organization that executes powerfully on its chosen growth strategy.

Summary

To get the most out of your team and create a culture of high performance, focus your efforts on aligning the organization for success. Alignment includes 1) Strategy, or making sure that the company is meeting the needs of its customers, now and over time; 2) Vision and Values, or making sure that people have bought into a common destination and shared modes of acceptable behavior; 3) Structure, or getting the organizational design right so that there is authority and accountability for key functions and the business can scale; 4) Process, or putting in place a method for making good decisions and implementing them fast; and 5) People, or attracting and cultivating talented employees who are a good fit and are intrinsically motivated to do the work that needs to get done. It takes tremendous energy and focus to get alignment – but when you finally get it right, your organization will execute very fast indeed!

Mastering Team-Based Decision Making

Like a rock rolling down hill, you want to get the mass of your organization moving quickly in the right direction.

Every business has mass, which is a measure of its resistance to change. The challenge in getting an organization to change direction is the fact that its mass isn’t neatly self-contained. Rather, it’s scattered throughout its people, systems, structures, and processes – and the collective inertia causes resistance to change. In order to get the organization to execute on its strategy, you’ve got to get the mass contained and headed in one direction.

Having aligned vision and values, as well as an aligned organizational structure, is the first step. If you have misalignment in these areas, then no matter what, you’re not going to get very far. At the same time, alignment in vision, values, and structure alone won’t cause the business to move. They just help to hold the mass together and keep internal friction low. Making the organization come alive and move quickly in a chosen direction requires that two things be done well: making and implementing decisions. In fact, the secret to organizational momentum lies in continually making good decisions and implementing them quickly.

The Most Important Process in Your Business

Every business relies on multiple processes (sales, customer service, finance, product development, marketing, etc.). These can be highly visible or nearly invisible, organic, haphazard, detailed, flexible, constant, or changing and either a boon or a burden. When a process is performing well, it allows the work to get done better and faster. When it’s not, you feel like you’re swimming upstream.

While your business has many different processes – some working well and others maybe a total clusterf#@*k – it’s the process of decision making and implementation that’s most critical to your success. Why? Because at the most fundamental level, a business is simply a decision-making and implementation system. Think about it — every problem and opportunity require a decision to be made (and yes, deciding to do nothing is a decision too) and a solution to be implemented. If the business does this well — if it continually makes good decisions and implements them fast — then its momentum will increase and it will be successful. If it does the opposite — if it makes bad decisions, or if it makes good decisions but implements them slowly, or my personal favorite, makes bad decisions and implements them quickly — then it will fail. Just as a haphazard sales process results in lost sales, poor fulfillment, and an inability to scale, a poor decision-making and implementation process results in poor decisions, flawed implementations, and an inability to scale the business.

What’s ironic about the process of decision making and implementation is that most businesses don’t even think of it as a process. (In case you’re asking… decision making and implementation are not two distinct things. They’re really two parts of one process that must go hand in hand. More on this in a bit.) While there’s usually a recognized process for functions like sales and customer service, the process for decision making and implementation is hidden in plain sight and often operating haphazardly. Like many of the principles I discuss in my work, it’s a crucial meta-level process with important applications all across the board.

In order to help your business accelerate its execution speed, I’m going to explain what an effective decision-making and implementation process is, how to do it well, who should be involved, and when to use it.

What Does an Effective Decision-Making and Implementation Process Look Like?

I want to give you an immediate sense of what the process of making good decisions and implementing them quickly actually looks like by sharing a short movie clip. I call it the “Dances with Wolves Management Meeting.” There’s a lot that modern-day management team meetings can learn from it. Unless you speak Sioux, you won’t understand what they’re saying – and it doesn’t matter. As they say, 90% of communication is non-verbal. The gist is that the senior tribe members have gathered to discuss what to do about foreigners invading their territory. You can compare that to any company faced with a cataclysmic market change and struggling with what to do about it.

Dances with Wolves Management Meeting from Lex Sisney on Vimeo.

Here’s what I want you to notice about the clip:

1) Notice that there’s a lot of conflict. People in the meeting have really strong opinions and don’t hold back in sharing them. Notice too that the conflict doesn’t destroy the affinity that tribe members have for one another. They’re debating the merits of different approaches in an attempt to find the best one. They don’t hold back but they’re not attacking each other, either. Each person has their say. When a person is speaking, each member seems to be genuinely listening and considering that perspective.

2) Notice that there’s one decision maker. It’s the wizened chief who sits back and listens until he’s heard enough perspectives. He gives plenty of time to review the information and generate insights from that information. But once that process is complete and the chief decides, the entire tribe gets behind the decision. There’s full debate pre-decision, no debate post-decision. Put another way, the meeting was fully participative but not democratic — there’s one person ultimately in charge. Once the decision is made, it’s time to stop debating and start executing.

3) Notice that it’s hard to figure out what to do. Life was complicated then. It’s even more complicated now. It’s hard to make good decisions. Despite the fact that it’s a critical decision, however, the chief doesn’t get excited or agitated. He’s calm; he’s cool; he listens. Then he decides and people act. While you may disagree with their decision, you’ll have a hard time disagreeing with the process the tribe used to reach it (other than they should have made a concerted effort to get more data up front — but more on the importance of data gathering in a bit).

4) Notice that the meeting has all the key influencers and centers of power in attendance. The chief and the tribe intuitively recognize a universal truth: Whoever is going to be impacted downstream by a decision, should be involved upstream in the decision-making process itself. Why? When people fully participate in the decision-making process, they’re less resistant to the implementation of its outcomes. In fact, they’re usually in favor of those outcomes and eagerly want to drive them forward. Imagine, on the other hand, if the chief skipped this meeting and decided what to do in isolation or with a few elders. Whatever the decision, the collective mass of the rest of the tribe would have slowed down or resisted, subtly or not so subtly, the implementation. Members of the tribe would have questioned, doubted, and disagreed (e.g., “Why are we fighting?” Or “Why are we fleeing?”). By involving a critical mass of the tribe up front in the decision itself, the resistance to change was much lower post-decision and implementation swifter.

5) Notice that the meeting doesn’t linger. The tribe gathers together. They’re all present and engaged. They invest as much time as they need and no more. Then they wrap. I’m willing to bet that most of your management meetings aren’t run nearly as efficiently.

The Rhythm of Decision Making and Implementation

There’s a rhythm to decision making and implementation. Most organizations screw it up, so pay attention. The right rhythm is slow-quick. It’s not quick-slow or quick-quick – and it’s clearly not slow-slow. What do I mean? Slow-quick means that you spend adequate time in making a good decision and then fly like a rocket on implementation. Don’t do the opposite. In other words, don’t make half-baked rapid-fire decisions that get bogged down on implementation. Don’t be that company that confuses rapid decision making with rapid implementation. And don’t be that company that’s just bogged down and lethargic generally. There’s a rhythm to life, a rhythm to dance, a rhythm to decision making and implementation. Be astute and aware enough to know which rhythm to activate and when.

The most common reason companies get this rhythm wrong is time pressure. You need to be able to transcend time pressure in the decision-making phase of the process and then use it to your advantage during the implementation phase. Allow me to explain. Constant time pressure results in poor decisions. When a company’s leadership feels a tremendous amount of pressure to execute quickly in a nebulous environment – and there’s a feeling that doing something is better than doing nothing – it will tend to make half-baked, rapid-fire decisions. This approach is a classic folly because the team fails to see the complete picture before them. Under time pressure, it fails to take into account different perspectives, gather enough information, get buy-in, find new insights in the data, make a well-rounded decision, and reinforce it. The result is a poor decision that gets bogged down on implementation. The team tries to go quick-quick but the result is quick-slow.

When we're under time pressure, the full picture looks like this. The results is poor decisions and slow or flawed implementations.

Make decisions once a critical mass of the company contributes to everyone to seeing the full picture. The result will be really fast implementation.

If you’ve ever worked in a “fire-ready-aim” setting, then you already know that making rapid-fire decisions doesn’t result in faster execution speed – which you do want. What happens instead is that a lot of half-baked decisions get rattled off, pile up, and create bottlenecks on implementation. And unlike decision making, implementation is where you want to use time pressure to your advantage, setting clear outcomes and delivery dates. It’s not how fast you’re deciding, it’s how fast you’re implementing on a well-formed solution.

Many startup founders will change their strategy from one moment to the next, justifying this with something like, “We have to be nimble around here. The market is always shifting and we’re trying to find our footing. We need to fail fast and keep trying. If you can’t keep up, get off the boat.” This is a perfect example of how the concept “fail fast” is often misunderstood. “Fail fast” is an expression used in high-tech startups. It means that, in environments with rapid change and time pressure, you can only find answers in the real world, not on a white board. You therefore want to get the product released promptly and tested in the hands of actual customers because this allows you to better understand their needs. If the product “fails,” this is seen as net positive (assuming client expectations are managed) because it eliminates more uncertainty about what doesn’t work and you can test again based on better information. However, “fail fast” isn’t a creed you use to keep making poor, ill-formed decisions time and again. It means that you need to implement a good decision fast. It’s a slogan for swift implementation, not erratic decision making.

Of course it’s not only startups that suffer from fast decision making and poor implementations. A recent prominent example is NetFlix. In 2011, NetFlix announced that it would segment its business into two distinct brands, one focused on streaming (NetFlix) and the other on DVD delivery (Qwikster). Reed Hastings, the company CEO, was right in my opinion to attempt to restructure the business into two distinct business units (see Strategy). But in their quest to hurry a decision, they screwed up the implementation. They didn’t set up a process to communicate and manage expectations with their customer base and key influencers; they didn’t acquire the social media identifiers for Qwikster; and they didn’t recognize that customers would balk at having two logins without a process to make it easy for them. The resulting market backlash really hurt them – cutting their market cap in half. Reed Hastings was later quoted as saying, “We simply moved too quickly, and that’s where you get those missed execution details. It’s causing, as you would expect, an internal reflectiveness. We know that we need to do better going forward. We need to take a few deep breaths and not move quite as quickly. But we also don’t want to overcorrect and start moving stodgily.”

That’s exactly right.

The truth is that fast execution requires a good decision-making process up front – and effective decision making takes time! It takes time to gather the right people, set the stage, gather data, generate insights, decide what to do, assign action items, and reinforce the decision. It’s counterintuitive but the right path forward is to slow down on the decision-making so that you can speed up on the implementation. In other words, you slow down to go fast.

Of course, this all presupposes that you actually have the time. If it’s a real crisis, then you’ll need to act swiftly and try to reduce the negative fallout later. But whatever you do, don’t confuse acting swiftly with acting smartly.

The Steps to an Effective Decision-Making and Implementation Process

There are six steps to effective decision making that are based on the agile development methodology of the Agile Alliance.1 The pre-step is based on the notion of “CAPI” or coalesced authority, power, and influence developed by Ichak Adizes and is what allows for fast implementation.2 Here’s how all the steps work together.

Pre-stepGet the Right People in the Room
Step #1Set the Stage
Step #2Gather Data
Step #3Generate Insights
Step #4Decide What to Do
Step #5Assign Action Steps
Step #6Reinforce

Pre-Step: Get the Right People in the Room

There’s a really simple rule of thumb to remember for good decision making and fast implementation: Identify who will be impacted by a decision downstream, and involve them upstream in the decision-making process. Intuitively, this makes sense. In your own life, would you prefer to personally decide what to do or have someone tell you what to do? When you’re given an opportunity to genuinely participate in a decision-making process, not only do you help to create a better decision through your unique insights, but you also become more willing to implement the decision itself. You feel a greater sense of ownership and less resistance to change.

Gathering a critical mass in the company – and specifically those who will be impacted downstream by a decision – also leads to better outcomes because different people see different pieces of the full picture. Each person impacted has a unique perspective on the problem or opportunity: One sees what to do; another has information on how to do it; another can see new ways to accomplish the same task; and yet another can empathize with how others will be impacted. Each person brings different information, experience, and knowledge to bear on the problem or opportunity, contributing to everyone seeing the full picture.

Here’s a funny story of a CEO who failed to gather in the decision-making process upstream those who would be impacted downstream. I’m not sure where it originates but I have to believe there’s some truth to it because it sounds all too common. It goes like this….

“A toothpaste factory had a problem: they sometimes shipped empty boxes, without the tube inside. This was due to the way the production line was set up, and people with experience in designing production lines will tell you how difficult it is to have everything happen with timings so precise that every single unit coming out of it is perfect 100% of the time. Small variations in the environment (which can’t be controlled in a cost-effective fashion) mean you must have quality assurance checks smartly distributed across the line so that customers all the way down the supermarket don’t get pissed off and buy someone else’s product instead.

Understanding how important that was, the CEO of the toothpaste factory got the top people in the company together and they decided to start a new project, in which they would hire an external engineering company to solve their empty boxes problem, as their engineering department was already too stretched to take on any extra effort.

The project followed the usual process: budget and project sponsor allocated, RFP, third-parties selected, and six months (and $8 million) later they had a fantastic solution — on time, on budget, high quality and everyone in the project had a great time. They solved the problem by using some high-tech precision scales that would sound a bell and flash lights whenever a toothpaste box weighing less than it should. The line would stop, and someone had to walk over and yank the defective box out of it, pressing another button when done.

A while later, the CEO decides to have a look at the ROI of the project: amazing results! No empty boxes ever shipped out of the factory after the scales were put in place. Very few customer complaints, and they were gaining market share. “That’s some money well spent!” – he says, before looking closely at the other statistics in the report.

It turns out, the number of defects picked up by the scales was 0 after three weeks of production use. It should’ve been picking up at least a dozen a day, so maybe there was something wrong with the report. He filed a bug against it, and after some investigation, the engineers come back saying the report was actually correct. The scales really weren’t picking up any defects, because all boxes that got to that point in the conveyor belt were good.

Puzzled, the CEO travels down to the factory, and walks up to the part of the line where the precision scales were installed. A few feet before it, there was a $20 desk fan, blowing the empty boxes out of the belt and into a bin. “Oh, that — one of the guys put it there ’cause he was tired of walking over every time the bell rang”, says one of the workers.”

You wouldn’t be reading this story if the CEO had first actually taken the time to include the shop floor workers — those who would be most impacted by the decision — in the decision-making process itself. If he had, he likely would have saved 6 months and $7,999,980! But clearly it is neither time- nor cost-effective in most instances to gather every individual who will be impacted downstream by a decision upstream in the decision-making process. That’s why a country uses a representative democracy, why a public company uses a board of directors, or why parents are the legal guardians of their children. These gather the mass and centralize the decision making into one representative body. The same is true for your organization. It has a critical mass that can represent the rest of the company.

So who do you gather in? The fact is that, in order to effect change, you must gather only the minimum amount of critical mass into the decision-making process – and that includes only those with authority, power, and influence over the implementation.

Authority

According to Ichak Adizes, authority is the legal right to decide “yes” and “no.” Many people can say “no” in an organization but very few can actually say “yes.” Think of authority like a crown and scepter. Whoever wears the crown has the authority to say “yes” and “no” within the context of what you want to achieve. In politics, the President has authority to sign a bill in to law or to veto it. That’s a “yes” or a “no.” In baseball, an umpire has authority to call balls and strikes. That’s a “yes” or a “no” too. In a trial, the jury has the authority to decide guilt or innocence. Wherever you observe the ability to say “yes” and “no,” that’s authority.

To gather authority, you’ve got to get at least the lowest level of authority involved in the decision-making process. For example, imagine a Director of Operations who is charged with improving efficiency in a production line. There’s a new machine that the Director wants to purchase. If she goes and asks the VP of Finance for the money, the VP of Finance can say, “No, sorry, it’s not in the budget.” Or, “No, you need to get approval from the budget committee first.” But notice how the VP of Finance cannot also say, “Yes, here’s your check” without additional authority being granted from somewhere else. Therefore, the VP of Finance has no authority over this particular decision.

Don’t confuse those who can say “yes” but not “no” with authority, either. In this case, the Director brings the purchase request to a budgetary committee. The budgetary committee can only endorse items that are within the budget and that fit the budgetary guidelines. That is, if it’s within the budget and fits the budgetary guidelines, and there are no errors on the requisition, then the budgetary committee must say “yes.” They have no authority to also say “no.” If the Director does get budgetary committee approval, she may mistakenly believe that she’s gotten authority for the project. She hasn’t.

Instead, to gather authority, the Director must seek out who can actually say “yes” and “no” to the purchase and involve him or her up front in the decision-making process. In this case, it may be herself (if the authority was granted to her by the CEO) or, if not, then it’s the CEO. If she fails to do this, then she’ll never have a clear indication of where the project really stands. If she’s smart, and if the decision is important, she’ll involve the person with authority to say “yes” and “no” in the decision-making process itself.

Power

Power is the ability to help or hinder. Think of power like a lever, whereby those who have power over implementation can effectively help lever you up or lever you down. Power exists throughout the organization, not just at the top. For example, in politics, the President has authority but Congress has power. It can help or hinder the President’s agenda. Even though you’re a parent and have the authority to say “yes” or “no,” your kids certainly have power in that they can help or hinder how you run the family. A CEO of a Fortune 500 company may seem to possess a lot of power, and they do, but if you look closely, you’ll see that the power also exists within the unions, customers, media, and management team – all of which can help or hinder the CEO’s agenda.

To gather power, recognize who can help or hinder the implementation of your objective and involve them up front in the decision-making process. Returning to the previous example, who might help or hinder the Director of Operation’s desire to improve efficiency? In addition to the Director’s boss, this would also include the staff who work on the production line, design the systems, and perform maintenance. Involving those with power up front will generally contribute to a better decision, which becomes their own. For example, it may be that a new machine isn’t required to improve efficiency. Perhaps someone on the production line has a creative solution. But if a new machine is required, then those who will be responsible for using it can help to choose the right one, based on their firsthand experience, and they won’t resist it like they would if it was purchased and installed out of the blue. Asking those who will have to use a piece of equipment in their daily work for their opinion on features may seem blindingly obvious. But it’s often overlooked like the example in the toothpaste factory.

Influence

Influence is the ability to get what you want without relying on authority or power. Think of influence like a pulpit. Individuals with a great deal of influence rely on who they are, who they know, and what they say. For example, a politician on the campaign trail is attempting to gain votes through influence. A company launching a marketing campaign to impact brand awareness and buying behavior is also working through influence. When a salesperson is meeting with a prospect, they’re also attempting to use influence to activate the prospect’s authority to purchase.

To gather influence, you should recognize who has influence over the implementation and involve them up front in the decision-making process as well. Who can influence, positively or negatively, the Director of Operation’s desire to improve efficiency and purchase a new machine? There’s the influence of the boss and staff. There’s also the influence of industry experts, case studies, and other buyers’ testimonials. For example, if the Director hires an industry consultant to assess the situation and make a recommendation, the consultant has influence over the outcome, but no authority or real power.

To drive this concept of gathering authority, power, and influence home, imagine that the circle below represents the size of the task that you want to accomplish. If it’s a small task that you can do yourself, then you already have the authority, power, and influence coalesced and there’s no need to involve anyone else. Just go do the task. But if this is a “big task,” this generally means that the mass of authority, power, and influence are spread out. There’s a lot of mass that must first be coalesced into the decision-making process itself.

If your task is big, then you'll need to gather in the authority, power, and influence to make it happen.

If you don’t gather in the mass, the resistance to change remains high; poor decisions get made because they lack vital inputs from those impacted by the decision; and implementation gets bogged down. Conversely, if you gather in the mass first, two things happen: 1) Better decisions are made because they take into account multiple different perspectives and interests and 2) Implementation is swift because a critical mass within the organization has adopted the decision as their own (assuming a good decision-making process was followed, there’s alignment in vision and values, and the structure is well designed) and they’ll collectively drive it forward. To use a physics analogy, if you first coalesce the organizational mass, then you can “hit” it with a force of change and it will quickly accelerate in a new direction.

Once you've gathered in the mass of authority, power, and influence, it's much easier to enact a change.

Now that you’re familiar with the basic concepts of authority, power, and influence, you can see their effects everywhere you look. In a courtroom, the judge has power to decide what is admissible as evidence. The jurors have authority to decide a verdict. The lawyers rely on influence to sway the jury. Each side calls in witnesses that can help or hinder their case. In high-level selling, one of the first questions an experienced salesperson will ask is, “Who has authority to make a decision?” Then, if they’re smart, they will do their best to get that person involved in the entire selling process. But if there’s a strong gatekeeper, the salesperson suffers from sleepless nights because they must rely purely on influencing others who in turn will hopefully influence the final authority. Successful salespeople usually have powerful networks of contacts (people who can help or hinder them in making introductions) and have mastered the art of influence to sway buyer behavior. And great salespeople always sell to the decision-maker directly.

To gather authority, power, and influence literally means to get everyone in the same room (or at least on the same phone call) and to follow the 6 steps of effective decision-making as a team. It does not mean to periodically ping the authority, power, and influence and update them on your progress. Nor does it mean to inform them once a decision has been made. To reduce the resistance to change, you need to involve them in the decision-making process itself. Why can’t you periodically just ping the authority, power, and influence of your progress? For the same reason that lawyers do not conduct a jury trial independently and then report their findings for the jury to decide upon. A fair trial couldn’t work this way. The coalesced authority, power, and influence must all participate in the decision-making process firsthand. Notice too that, if a jury member, lawyer, or judge can’t make the day of the trial, then the trial is postponed. Similarly, if you can’t get the authority, power, and influence in the room or on the phone at the same time, you would be well served to postpone the meeting to a later date. If you try to press ahead, you’ll likely end up increasing the resistance to change, not decreasing it.

Step 1: Set the Stage

Once you’ve identified and gathered in the mass of authority, power, and influence, you need to set the stage of the decision-making process. Setting the stage means getting everyone in the room on the same page about why the meeting or project is taking place, the desired outcomes, the participants’ roles and responsibilities (including who has authority to make the final yes/no decision), and the rules and expectations for the process. Because time pressure is the enemy of effective decision making, one of the most important things you can do when setting the stage is to create the right environment for the best decision to unfold. This requires unfreezing the group, getting initial buy-in to the problem/opportunity, and running efficient and timely meetings.

Unfreezing
One of the most important parts of setting the stage is easy to do but often mistakenly skipped. What is it? It’s what the founder of organizational psychology, Kurt Lewin, called “unfreezing.” What Lewin recognized in the early 1900s is that inertia exists within people just as it exists within objects. Basically, when you and I show up to a meeting, our bodies are present but our minds are not. Instead, we’re stuck in a mental inertia still thinking about something else. The last phone call we were on. The emails we just received. A family or personal issue. The work we still need to accomplish. The hot girl or guy we fantasize about. We’re hungry. Whatever. The list is infinite.

The only purpose of having a meeting is to have the team participate through the process as one unit, through which each participant brings their whole being, experience, knowledge, and awareness to the task at hand. This requires everyone involved to first unlock or unfreeze their mental inertia — to create a sense of space or mental capacity to focus on the task and embody a future change. If this was true in the early 1900s, its even more true in our faster-paced times.

It’s actually pretty easy to unfreeze a group as long as you take a few minutes to do it. How? The simplest way is to get each participant to talk out loud. Just say something. Anything. It could be as simple as “How was your weekend?” to “What is costing your energy right now?” to “Ready?” What you’ll notice is that it doesn’t matter so much what the question is as it does for each participant to say something out loud. For example, I was facilitating a workshop this week and after the group returned from a short break I asked each person in turn, “Are you ready to continue?” One participant responded, “No, I’m not. I just got a really bad phone call about a deal I was trying to close. I’m devastated.” He sat there for a few more moments, then he said, “OK, now that I cleared that out loud, I’m ready to go.” Speaking out loud will always help to shift energy in a person and bring more presence to the task at hand.

Getting Initial Buy-in to the Problem or Opportunity

In addition to unfreezing the group, you’ll want to help set the stage by ensuring that the group has a unified vision of what it’s trying to accomplish. I recommend that you tie the desired outcomes for the team and/or project into the personal desired outcomes of the individual participants. One way to do this is to simply ask each person, “What is the desired outcome for this meeting (or this project) for you personally?” and write down his or her response. Then once each person has had a chance to state his or her desired outcomes, make sure that all the desired outcomes are aligned and attainable and if not, address them up front accordingly. “This one seems out of scope for this particular project. What do you guys think?” Once you’ve got alignment on desired outcomes, people should be clear and eager to dive into the process.

The reason I suggest you ask participants about personal desired outcome is that, when we have a personal interest in something, we’re much more engaged in attaining it. Often people show up to a meeting with no clear idea why they are there in the first place. By asking “what’s in it for you?” you’ll help them to reflect on and clarify what any potential rewards may be. “Hmmm, you know, I’d like to learn more about how XYZ works.” Or, “I’d like to be part of a kick-ass team that really produces results.” If a person has no personal desired outcome related to this meeting and/or project, it’s a sign that they probably shouldn’t be in that meeting.

Running Efficient and Timely Meetings

When it comes to setting expectations on time management in the decision-making process, here are some guidelines. Most of the time spent in decision making is invested in Steps 1 to 3 (Setting the Stage, Gathering Data, and Generating Insights). Once this is accomplished, it’s pretty straightforward to complete Step 4 (Deciding What to Do) and Step 5 (Assigning Action Steps for Implementation). A general rule of thumb is to invest 80% of the time in Steps 1 through 3 and 20% of the time in Steps 4 through 6. That means in an hour-long meeting, 42 minutes would be allocated to setting the stage, gathering facts and generating insights and just 18 minutes to deciding what to do, assigning action steps, and integration. If you feel that 18 minutes is not enough time to decide what to do, assign action steps, and integrate, it’s a clear indication that you’ll need to schedule a longer meeting. But don’t skimp on the first three steps. That’s where most of your time investment should occur. If you do skimp, it will come back to bite you through poor decisions and flawed implementations.

My grandfather used to say that the mind can only handle what the seat can endure. Speaking as a person who has a hard time sitting long periods, I concur. My favorite way to handle this is to run 75-minute team sessions with a 5 to 15 minute break in between. This allows enough time for the group to make meaningful progress. At the same time, it allows the group enough space and personal freedom to restore the body, check their email, make a phone call, etc. Get agreement from the group up front about the time frames in which you’ll run sessions and breaks. This will allow participants to focus on the task at hand.

Just a couple of words of advice. You need to be disciplined in time and flexible in process. This means that there will be occasions when you need to spend more time in one part of the process than you were anticipating. But remain disciplined in time. When it’s time to break, break. When it’s time to wrap, wrap. Also, make sure to unfreeze the group when they come back from a break or start a new session. The team needs to proceed through the process as one unit. Once the stage is set, it’s time to move into Step 2: Gather Data.

Step 2: Gather Data

Gathering the data means collecting all the facts and perspectives in the room on the issue at hand. If you don’t take the time to gather all the facts, the group is going to miss the full picture and make a half-baked decision. Each person will see the problem in a different light and no agreement will be reached on what the core issue really is.

Here’s an example to show what happens when you skip gathering data. Imagine a technology company that is experiencing a 10% reduction from the previous quarter’s sales. Alarmed, the board of directors asks the CEO to identify the problem and present a solution at the next board meeting. The CEO gathers the VP of Sales, VP of Marketing, CTO, and CFO in a conference room and says, “All right. We’re down 10% this quarter. The board wants answers. What are your solutions?” This approach to problem solving is a disaster in the making. It’s not the right way to make good decisions at all. Why? Because the leader skipped gathering data as a group and, as a result, each individual in the room will have a divergent perspective and conflicting interests and styles that never get reconciled.

In this scenario, the VP of Sales, who’s a hard-charging, task-focused type (Psiu) will likely point the finger at marketing: “We’re not selling because we’re not driving enough inbound leads. Get me more leads and we’ll sell ‘em!” The VP of Marketing, who’s more of a creative, big-picture type (psIu), will point the finger at technology: “We’re not selling because the product features we’ve been requesting are six months behind schedule!” The CTO, who likes to keep things nice and stable (pSiu) will point the finger back at marketing and sales: “We’re not selling because the business side keeps changing requirements in the middle of our production cycle!” And the CFO, who prefers to keep the drama low (psiU) will respond with, “We’re not selling because there’s too much infighting!” After an hour of fruitless discussion, the CEO throws up his arms in exasperation, makes a rushed set of decisions, and barks out his orders for the team to follow. The executive team all nod their heads in agreement, but inside they’re thinking, “Oh boy, here we go again. Another half-baked plan that’s not going to get us anywhere.”

What should have happened? The group should have first gathered data on multiple aspects of the problem. For example, what is the economic growth rate during that quarter? What are competitive sales figures? What is the client satisfaction rating? What facts do sales, marketing, technology, and finance have that can add clarity to the picture? Stick to data gathering here. Don’t dive into solutions yet, no matter what. When someone tries to go for the solution (and they will) stop them: “We’ll get to solutions in a bit but let’s first make sure that we have a full picture. Let’s keep gathering information.”

What happens if you don’t have the data you need? Go get it. Break the meeting. Assign action steps for people to come back with good, clean data as soon as possible. Set a new meeting to continue with the information the team needs to make a good decision.

There are two reasons that gathering good data from the team is so critical. The first is that good information is like a light in the darkness. Change constantly alters reality – and the faster the change, the harder it is to see and understand what’s happening and adapt to it. What was a good decision last year/month/week/yesterday may no longer be a good decision now. People change, markets adapt, situations alter, and technologies disrupt and get disrupted. Good information makes it possible to manage all this because it allows you to better understand and respond to each of the phases you’re moving through. It reveals what’s really happening now and provides insights into what might happen next.

The second reason to gather data as a group is that each person brings a different perspective to the table. Without a shared “data-base” each person is going to operate as if their perspective were the right one, thus missing key elements of the situation. If, however, the entire team can all agree that “yes, this is the data and we believe it’s correct and comprehensive,” that opens the door to new perspectives and a coherent understanding of the situation. It’s a good shared data set that leads to the next step, Generating Insights.

Step 3: Generate Insights

Now that the team has the data and can agree on the facts, it’s time to leverage the collective wisdom of the group to generate insights. What might be causing these facts to occur? What are the underlying causes and what are the symptoms? It’s important to get all the perspectives on the table before deciding what to do. Stimulate an environment of curious exploration versus blame and finger pointing. In the previous example, one insight might be that there’s poor coordination between development and customer requirements. Another might be that sales are down because the economy tanked. It doesn’t matter at this stage which insights are correct, only that the group is collectively generating insights based on a shared set of facts.

Step 4: Decide What To Do

If the group has gone through a process of setting the stage, gathering the facts, and generating insights, now is the time for the authority in the room to decide what to do. Good decision making is not a democratic process; it’s a participative process. By creating an environment of authentic group participation, the person who is responsible for having the decision implemented must now make it. Because those with power and influence over the implementation have been given the opportunity to have their voice heard, they should stand behind the decision. It does not mean that the decision will make everyone happy, but it does mean that the team now needs to back whatever decision is made. After facilitating over 100 group decision-making processes, I have yet to witness the ultimate authority make a decision that is at odds with the group. It’s not that the authority is afraid to make a hard decision; rather, it’s that everyone involved has reached the right decision together. When this occurs, it’s actually pretty easy and fast to move ahead towards implementation.

Step 5: Assign Action Steps

Now that a basic decision has been made, it’s time to assign action steps and amp up the time pressure on the implementation. In simple terms, the group needs to identify what to do, who is doing it, and by when. You’re setting clear deliverables, clear dates, and unarguable accountability to execute on that decision. In this part of the process, there may be a slight give and take between the authority in the room and those charged with performing different aspects of the implementation. Arthur Authority asks, “Frank, when do you think you can complete the XYZ analysis?” Frank replies, “I need to do a little research and speak with Marge. I’ll have it to you by next Friday.” If this is amenable to Arthur’s needs, the action item gets accepted and written down: “Frank to complete XYZ analysis by next Friday.” If it’s not amenable, then Frank and Arthur need to identify ways to change the task or speed the process. Because they’ve gone through the entire process together, both Frank and Arthur are fully aware of the broader implications, needs, and purpose of the action item. Consequently, there’s usually really easy agreement and clarity on action items. And when in doubt, lean towards more time pressure than less.

Compare this to a scenario when Arthur and Frank don’t go through the decision-making process together. In this scenario, Arthur has to get one-on-one time with Frank, explain the situation, and attempt to get Frank to change his schedule and priorities. It’s not always easy to do – and it generally results in a poorer decision and a bogged-down implementation.

Step 6: Reinforce

Reinforcement is essential to a well-run decision-making process. In this final phase, the group reflects on and integrates the process they just experienced and the decisions reached. It’s not a chance to complain, but rather to verbally lock in and commit to the implementation. A simple way to reinforce and close the meeting is to poll the group on their individual experiences during the process, as well as their views on how to improve it or how to support the implementation. The authority in the room is the last person to speak and then the meeting is closed. The end result is always better decisions and greater buy-in for the implementation. If not, it’s a clear indication that the requisite level of authority, power, and influence weren’t in the room, that there was a breakdown in the process, or that there’s a greater underlying misalignment at the level of vision and values or structure.

Executing on Short-Range Tasks vs. Long-Range Business Development

Just as there is a particular rhythm to follow for effective decision making and implementation, there’s a particular rhythm for managing business needs between short-range execution and long-range business development. From the article on organizational structure, you’ll learn that short-run needs always overpower long-range ones. You therefore need to create an organizational process that allows for effective long-range planning and development combined with short-range execution.

The rhythm goes like this. One to two times per year, a Company Council, represented by the key functional heads and key team members throughout the organization (those 1s and 2s you want to groom for the long term), should gather together off site to set the long-range (one-to-three-year) strategy and to align the organizational structure to support that strategy. The goal of this strategic alignment session is to allow everyone to focus on long-run changes impacting the market and the business and to identify potential improvement areas within the business. It’s important to do this long-range work off site to stimulate a new and broader perspective among the team. Once the long-range strategy is identified, shorter-range goals and outcomes are set, budgets and rewards are established, and the key performance indicators (KPIs) are identified for each business function.

Armed with a common long-range strategy, clearly defined authority and accountability within the structure, and defined short-range goals, the core functional heads form into a Leadership Team, led by the CEO, that meets weekly or biweekly on site to review progress, make decisions, and execute the plan. These short-range tactics support the long-range development plan. This shared alignment and dialogue among the Leadership Team allows everyone to stay on the same page, track and adjust performance, and keep the friction low. It should also reduce the total number of meetings conducted each week because, instead of scheduling ad hoc meetings, decisions are funneled into regular Leadership Team meetings where a good decision-making process is followed.

Watch for Signs of Deeper Problems

As you gather the authority, power, and influence over the implementation into the decision-making process, you will be well served to also recognize the signs of organizational misalignment or inertia. If there’s significant misalignment within the organization’s Execution Diamond (Vision and Values, Structure, and People), then your task will be very challenging indeed. Instead, your best course of action would be to gather in the authority, power, and influence to first realign the Execution Diamond. Once that is aligned, you can then attack the problem or opportunity you want to resolve.

Summary

In order to increase organizational momentum, you must make good decisions and implement them swiftly. In order to do that, you have to first gather in the mass of authority, power, and influence over the implementation and reduce the resistance to change. Then a force of change can be applied through an effective decision-making and implementation process and the organization will accelerate quickly in the desired direction. Any time a key decision needs to get made, follow a sound process that begins by setting the stage, followed by gathering the data, generating insights, deciding what to do, assigning action steps, and reinforcing the decision. With the right people in the room, good decision making naturally leads to swift implementation.

Back to Tutorials.


1.The Agile Alliance

2. Ichak Adizes, Managing Corporate Lifecycles, Santa Barbara: Adizes Institue Publishing, 2004.

Organizational Physics Business Acceleration Coaching

Q4 of 2011 was a big period for me. I successfully restructured 3 fast-growing companies while personally coaching 17 entrepreneurs and business leaders. Wow! I’m grateful for the opportunities and to participate in some awesome results. What kind of results? Here’s a snapshot:

  • A company with flat sales the past two years was struggling with accelerating growth. The company co-founders were feeling burned out. We reset the strategy, restructured the organization so the founders could escape low-value tasks, repositioned the story to appeal to investors, and accelerated the product development process. The result? The company raised over $500K in financing, launched a new killer app, and already has a full sales pipeline for 2012.
  • A 5-year-old company had been losing money since its inception. It had a strong culture but was suffering from customer turnover and too many competing priorities, with no way to manage them effectively. We implemented a new go-to-market strategy, restructured the company for clearer ownership, and streamlined the decision-making and product development processes. The result? The company reached cash flow profitability for the first time and is poised to grow from $3M to $7M in 2012.
  • After Google changed its AdSense algorithm, a 7-year-old international internet company lost 90% of its revenue overnight. Ouch. At the same time, the founder was feeling ready to move on and pursue the next new thing. What did we do? We quickly sold off the business for over six figures, netting a nice profit. Then we launched an entirely new business that the founder is truly passionate about.

My goal this quarter is to reach a new audience of entrepreneurs and business leaders. I have a few slots open. There’s no better time than right now to align and activate for the coming year around proven principles that drive results. If 2012 feels like your year to bust out in your business and personal life, consider the impact of 1-on-1 coaching with a master at organizational transformation. This is not a program for everyone.

You’re an ideal fit for this program if…

  • Your business has $2M to $20M in revenue.
  • You’re an entrepreneur with a great opportunity but you’re stuck in the founder’s trap (you can’t seem to get the business to scale beyond you).
  • You’re a CEO who needs to take things to the next level in strategy, team, and execution.
  • You’re committed to playing flat out and to try on new methods

If you’re ready to level up, I’ve got a simple process and powerful principles to get you tangible results starting this quarter.

I only work with select individuals and companies. The first step is a get-to-know-you meeting to see if there’s a good fit. Just contact me at the number below to arrange an initial conversation.

Thanks and best wishes for a great 2012,

Lex

PS. Please share this with others in your network who you think will be interested in organizational transformation.

The 5 Classic Mistakes in Organizational Structure: Or, How to Design Your Organization the Right Way

Is your organization designed like a parachute or a rocket?

If I were to ask you a random and seemingly strange question, “Why does a rocket behave the way it does and how is it different from a parachute that behaves the way it does?” You’d probably say something like, “Well, duh, they’re designed differently. One is designed to go fast and far and the other is designed to cause drag and slow an objection in motion. Because they’re designed differently, they behave differently.” And you’d be correct. How something is designed controls how it behaves. (If you doubt this, just try attaching an engine directly to a parachute and see what happens).

But if I were to ask you a similar question about your business, “Why does your business behave the way it does and how can you make it behave differently?” would you answer “design?” Very few people — even management experts — would. But the fact is that how your organization is designed determines how it performs. If you want to improve organizational performance, you’ll need to change the organizational design. And the heart of organizational design is its structure.

Form Follows Function — The 3 Elements of Organizational Structure & Design

A good design supports its purpose.

There’s a saying in architecture and design that “form follows function.” Put another way, the design of something should support its purpose. For example, take a minute and observe the environment you’re sitting in (the room, building, vehicle, etc.) as well as the objects in it (the computer, phone, chair, books, coffee mug, and so on). Notice how everything serves a particular purpose. The purpose of a chair is to support a sitting human being, which is why it’s designed the way it is. Great design means that something is structured in such a way that it allows it to serve its purpose very well. All of its parts are of the right type and placed exactly where they should be for their intended purpose. Poor design is just the opposite. Like a chair with an uncomfortable seat or an oddly measured leg, a poorly designed object just doesn’t perform like you want it to.

Even though your organization is a complex adaptive system and not static object, the same principles hold true. If the organization has a flawed design, it simply won’t perform well. It must be structured (or restructured) to create an design that supports its function or business strategy. Just like a chair, all of its parts or functions must be of the right type and placed in the right location so that the entire system works well together. What actually gives an organization its “shape” and controls how it performs are three things:

  1. The functions it performs.
  2. The location of each function.
  3. The authority of each function within its domain.

The functions an organization performs are the core areas or activities it must engage in to accomplish its strategy (e.g. sales, customer service, marketing, accounting, finance, operations, CEO, admin, HR, legal, PR, R&D, engineering, etc.). The location of each function is where it is placed in the organizational structure and how it interacts with other functions. The authority of a function refers to its ability to make decisions within its domain and to perform its activities without unnecessary encumbrance. A sound organizational structure will make it unarguably clear what each function (and ultimately each person) is accountable for. In addition, the design must both support the current business strategy and allow the organization to adapt to changing market conditions and customer needs over time.

What Happens When an Organization’s Structure Gets Misaligned?

It's very hard to operate within a broken structure.

When you know what to look for, it’s pretty easy to identify when an organization’s structure is out of whack. Imagine a company with an existing cash cow business that is coming under severe pricing pressure. Its margins are deteriorating quickly and the market is changing rapidly. Everyone in the company knows that it must adapt or die. Its chosen strategy is to continue to milk the cash cow (while it can) and use those proceeds to invest in new verticals. On paper, it realigns some reporting functions and allocates more budget to new business development units. It holds an all-hands meeting to talk about the new strategy and the future of the business. Confidence is high. The team is a good one. Everyone is genuinely committed to the new strategy. They launch with gusto.

But here’s the catch. Beneath the surface-level changes, the old power structures remain. This is a common problem with companies at this stage. The “new” structure is really just added to the old one, like a house with an addition – and things get confusing. Who’s responsible for which part of the house? While employees genuinely want the new business units to thrive, there’s often a lack of clarity, authority, and accountability around them. In addition, the new business units, which need freedom to operate in startup mode, have to deal with an existing bureaucracy and old ways of doing things. The CEO is generally oblivious to these problems until late in the game. Everyone continues to pay lip service to the strategy and the importance of the new business units but doubt, frustration, and a feeling of ineptitude have already crept in. How this happens will become clearer as you read on.

Edwards Demming astutely recognized that “a bad system will defeat a good person every time.” The same is true of organizational structure. Structure dictates the relationship of authority and accountability in an organization and, therefore, also how people function. For this reason, a good team can only be as effective as the structure supporting it. For even the best of us, it can be very challenging to operate within an outdated or dysfunctional structure. It’s like trying to sail a ship with a misaligned tiller. The wind is in your sails, you know the direction you want to take, but the boat keeps fighting against itself.

An organization’s structure gets misaligned for many reasons. But the most common one is simply inertia. The company gets stuck in an old way of doing things and has trouble breaking free of the past. How did it get this way to begin with? When an organization is in startup to early growth mode, the founder(s) control most of the core functions. The founding engineer is also the head of sales, finance, and customer service. As the business grows, the founder(s) become a bottleneck to growth — they simply can’t do it all at a larger scale. So they make key hires to replace themselves in selected functions – for example, a technical founder hires a head of sales and delegates authority to find, sell, and close new accounts. At the same time, the founder(s) usually find it challenging to determine how much authority to give up (too much and the business could get ruined; too little and they’ll get burned out trying to manage it all).

As the business and surrounding context develop over time, people settle into their roles and ways of operating. The structure seems to happen organically. From an outsider’s perspective, it may be hard to figure out how and why the company looks and acts the way it does. And yet, from the inside, we grow used to things over time and question them less: “It’s just how we do things around here.” Organizations continue to operate, business as usual, until a new opportunity or a market crisis strikes and they realize they can’t succeed with their current structures.

What are the signs that a current structure isn’t working? You’ll know its time to change the structure when inertia seems to dominate — in other words, the strategy and opportunity seem clear, people have bought in, and yet the company can’t achieve escape velocity. Perhaps it’s repeating the same execution mistakes or making new hires that repeatedly fail (often a sign of structural imbalance rather than bad hiring decisions). There may be confusion among functions and roles, decision-making bottlenecks within the power centers, or simply slow execution all around. If any of these things are happening, it’s time to do the hard but rewarding work of creating a new structure.

The 5 Classic Mistakes in Organizational Structure

Bad design is bad design in any field.

Here are five telltale signs of structure done wrong. As you read them, see if your organization has made any of these mistakes. If so, it’s a sure sign that your current structure is having a negative impact on performance.

Mistake #1: The strategy changes but the structure does not

Every time the strategy changes — including when there’s a shift to a new stage of the execution lifecycle — you’ll need to re-evaluate and change to the structure. The classic mistake made in restructuring is that the new form of the organization follows the old one to a large degree. That is, a new strategy is created but the old hierarchy remains embedded in the so-called “new” structure. Instead, you need to make a clean break with the past and design the new structure with a fresh eye. Does that sound difficult? It generally does. The fact is that changing structure in a business can seem really daunting because of all the past precedents that exist – interpersonal relationships, expectations, roles, career trajectories, and functions. And in general, people will fight any change that results in a real or perceived loss of power. All of these things can make it difficult to make a clean break from the past and take a fresh look at what the business should be now. There’s an old adage that you can’t see the picture when you’re standing in it. It’s true. When it comes to restructuring, you need to make a clean break from the status quo and help your staff look at things with fresh eyes. For this reason, restructuring done wrong will exacerbate attachment to the status quo and natural resistance to change. Restructuring done right, on the other hand, will address and release resistance to structural change, helping those affected to see the full picture, as well as to understand and appreciate their new roles in it.

Mistake #2: Functions focused on effectiveness report to functions focused on efficiency

Efficiency will always tend to overpower effectiveness. Because of this, you’ll never want to have functions focused on effectiveness (sales, marketing, people development, account management, and strategy) reporting to functions focused on efficiency (operations, quality control, administration, and customer service). For example, imagine a company predominantly focused on achieving Six Sigma efficiency (which is doing things “right”). Over time, the processes and systems become so efficient and tightly controlled, that there is very little flexibility or margin for error. By its nature, effectiveness (which is doing the right thing), which includes innovation and adapting to change, requires flexibility and margin for error. Keep in mind, therefore, that things can become so efficient that they lose their effectiveness. The takeaway here is: always avoid having functions focused on effectiveness reporting to functions focused on efficiency. If you do, your company will lose its effectiveness over time and it will fail.

Mistake #3: Functions focused on long-range development report to functions focused on short-range results

Just as efficiency overpowers effectiveness, the demands of today always overpower the needs of tomorrow. That’s why the pressure you feel to do the daily work keeps you from spending as much time with your family as you want to. It’s why the pressure to hit this quarter’s numbers makes it so hard to maintain your exercise regime. And it’s why you never want to have functions that are focused on long-range development (branding, strategy, R&D, people development, etc.) reporting to functions focused on driving daily results (sales, running current marketing campaigns, administration, operations, etc.). For example, what happens if the marketing strategy function (a long-range orientation focused on branding, positioning, strategy, etc.) reports into the sales function (a short-range orientation focused on executing results now)? It’s easy to see that the marketing strategy function will quickly succumb to the pressure of sales and become a sales support function. Sales may get what it thinks it needs in the short run but the company will totally lose its ability to develop its products, brands, and strategy over the long range as a result.

Mistake #4: Not balancing the need for autonomy vs. the need for control

The autonomy to sell and meet customer needs should always take precedence in the structure — for without sales and repeat sales the organization will quickly cease to exist. At the same time, the organization must exercise certain controls to protect itself from systemic harm (the kind of harm that can destroy the entire organization). Notice that there is an inherent and natural conflict between autonomy and control. One needs freedom to produce results, the other needs to regulate for greater efficiencies. The design principle here is that as much autonomy as possible should be given to those closest to the customer (functions like sales and account management) while the ability to control for systemic risk (functions like accounting, legal, and HR) should be as centralized as possible. Basically, rather than trying to make these functions play nice together, this design principle recognizes that inherent conflict, plans for it, and creates a structure that attempts to harness it for the overall good of the organization. For example, if Sales is forced to follow a bunch of bureaucratic accounting and legal procedures to win a new account, sales will suffer. However, if the sales team sells a bunch of underqualified leads that can’t pay, the whole company suffers. Therefore, Sales should be able to sell without restriction but also bear the burden of underperforming accounts. At the same time, Accounting and Legal should be centralized because if there’s a loss of cash or a legal liability, the whole business is at risk. So the structure must call this inherent conflict out and make it constructive for the entire business.

Mistake #5: Having the wrong people in the right functions

I’m going to talk about how to avoid this mistake in greater detail in a coming article in this series but the basics are simple to grasp. Your structure is only as good as the people operating within it and how well they’re matched to their jobs. Every function has a group of activities it must perform. At their core, these activities can be understood as expressing PSIU requirements. Every person has a natural style. It’s self-evident that when there’s close alignment between job requirements and an individual’s style and experience, and assuming they’re a #1 Team Leader in the Vision and Values matrix, then they’ll perform at a high level. In the race for market share, however, companies make the mistake of mis-fitting styles to functions because of perceived time and resource constraints. For example, imagine a company that just lost its VP of Sales who is a PsIu (Producer/Innovator) style. They also have an existing top-notch account manager who has a pSiU (Stabilizer/Unifier) style. Because management believes they can’t afford to take the time and risk of hiring a new VP of Sales, they move the Account Manager into the VP of Sales role and give him a commission-based sales plan in the hope that this will incentivize him to perform as a sales person. Will the Account Manager be successful? No. It’s not in his nature to hunt new sales. It’s his nature to harvest accounts, follow a process, and help customers feel happy with their experience. As a result, sales will suffer and the Account Manager, once happy in his job, is now suffering too. While we all have to play the hand we’re dealt with, placing people in misaligned roles is always a recipe for failure. If you have to play this card, make it clear to everyone that it’s only for the short run and the top priority is to find a candidate who is the right fit as soon as possible.

How to Design Your Organization’s Structure

If you want to go far, you'll need a good design.

The first step in designing the new structure is to identify the core functions that must be performed in support of the business strategy, what each function will have authority and be accountable for, and how each function will be measured (Key Performance Indicators or KPIs). Then, avoiding the 5 classic mistakes of structure above, place those functions in the right locations within the organizational structure. Once this is completed, the structure acts as a blueprint for an organizational chart that calls out individual roles and (hats). A role is the primary task that an individual performs. A (hat) is a secondary role that an individual performs. Every individual in the organization should have one primary role and — depending on the size, complexity, and resources of the business — may wear multiple (hats). For example, a startup founder plays the CEO role and also wears the hats of (Business Development) and (Finance). As the company grows and acquires more resources, she will give up hats to new hires in order to better focus on her core role.

Getting an individual to gracefully let go of a role or a hat that has outgrown them can be challenging. They may think and feel, “I’m not giving up my job! I’ve worked here for five years and now I have to report to this Johnny-Come-Lately?” That’s a refrain that every growth-oriented company must deal with at some point. One thing that can help this transition is to focus not on the job titles but on the PSIU requirements of each function. Then help the individual to identify the characteristics of the job that they’re really good at and that they really enjoy and seek alignment with a job that has those requirements. For example, the title VP of Sales is impressive. But if you break it down into its core PSIU requirements, you’ll see that it’s really about cold calling, managing a team, and hitting a quota (PSiU). With such a change in perspective, the current Director of Sales who is being asked to make a change may realize, “Hmm… I actually HATE cold calling and managing a team of reps. I’d much rather manage accounts that we’ve already closed and treat them great. I’m happy to give this up.” Again, navigating these complex emotional issues is hard and can cost the company a lot of energy. This is one of the many reasons that using a sound organizational restructuring process is essential.

A structural diagram may look similar to an org chart but there are some important differences. An org chart shows the reporting functions between people. What we’re concerned with here, first and foremost, are the functions that need to be performed by the business and where authority will reside in the structure. The goal is to first design the structure to support the strategy (without including individual names) and then to align the right people within that structure. Consequently, an org chart should follow the structure, not the other way around. This will help everyone avoid the trap of past precedents that I discussed earlier. This means – literally – taking any individual name off the paper until the structure is designed correctly. Once this is accomplished, individual names are added into roles and (hats) within the structure.

After restructuring, the CEO works with each new functional head to roll out budgets, targets, and rewards for their departments. The most important aspect of bringing a structure to life, however, isn’t the structure itself, but rather the process of decision making and implementation that goes along with it. The goal is not to create islands or fiefdoms but an integrated organization where all of the parts work well together. If structure is the bones or shape of an organization, then the process of decision making and implementation is the heart of it. I’m going to discuss this process in greater detail in the next article in this series. It can take a few weeks to a few months to get the structure humming and people comfortable in their new roles. You’ll know you’ve done it right when the structure fades to the background again and becomes almost invisible. It’s ironic that you do the hard work of restructuring so you can forget about structure. Post integration, people should be once again clear on their roles, hats, and accountabilities. The organization starts to really hum in its performance and execution speed picks up noticeably. Roaring down the tracks towards a common objective is one of the best feelings in business. A good structure makes it possible.

Structure Done Wrong: An Example to Avoid

Below is a picture of a typical business structure done wrong. The company is a software as a service (Saas) provider that has developed a new virtual trade show platform. They have about ten staff and $2M in annual revenues. I received this proposed structure just as the company was raising capital and hiring staff to scale its business and attack multiple industry verticals at once. In addition to securing growth capital, the company’s greatest challenge is shifting from a startup where the two co-founders do most everything to a scalable company where the co-founders can focus on what they do best.

Structure done wrong. Can you tell what's wrong with this picture?

So what’s wrong with this structure? Several things. First, this proposed structure was created based on the past precedents within the company, not the core functions that need to be performed in order to execute the new strategy. This will make for fuzzy accountability, an inability to scale easily, new hires struggling to make a difference and navigate the organization, and the existing team having a hard time growing out of their former hats into dedicated roles. It’s difficult to tell what are the key staff the company should hire and in what sequence. It’s more likely that current staff will inherit functions that they’ve always done, or that no one else has been trained to do. If this structure is adopted, the company will plod along, entropy and internal friction will rise, and the company will fail to scale.

The second issue with the proposed structure is that efficiency functions (Tech Ops and Community Operations) are given authority over effectiveness functions (R&D and Account Management). What will happen in this case? The company’s operations will become very efficient but will lose effectiveness. Imagine being in charge of R&D, which requires exploration and risk taking, but having to report every day to Tech Ops, which requires great control and risk mitigation. R&D will never flourish in this environment. Or imagine being in charge of the company’s key accounts as the Account Manager. To be effective, you must give these key accounts extra care and attention. But within this structure there’s an increasing demand to standardize towards greater efficiency because that’s what Community Operations requires. Efficiency always trumps effectiveness over time and therefore, the company will lose its effectiveness within this structure.

Third, short-run functions are given authority over long-run needs. For example, Sales & Marketing are both focused on effectiveness but should rarely, if ever, be the same function. Sales has a short-run focus, marketing a long-run focus. If Marketing reports to Sales, then Marketing will begin to look like a sales support function, instead of a long-run positioning, strategy, and differentiation function. As market needs shift, the company’s marketing effectiveness will lose step and focus. It won’t be able to meet the long-run needs for the company.

Fourth, it’s impossible to distinguish where the authority to meet customer needs resides and how the company is controlling for systemic risk. As you look again at the proposed structure, how does the company scale? Where is new staff added and why? What’s the right sequence to add them? Who is ultimately responsible for profit and loss? Certainly it’s the CEO but if the CEO is running the day-to-day P&L across multiple verticals, then he is not going to be able to focus on the big picture and overall execution. At the same time, who is responsible for mitigating systemic risk? Within this current structure, it’s very likely that the CEO never extracts himself from those activities he’s always done and shouldn’t still be doing if the business is to scale. If he does attempt to extract himself, he’ll delegate without the requisite controls in place and the company will make a major mistake that threatens its life.

Structure Done Right

Below is a picture of how I realigned the company’s structure to match its desired strategy. Here are some of the key things to recognize about this new structure and why it’s superior to the old one. Each box represents a key function that must be performed by the business in its chosen strategy. Again, this is not an org chart. One function may have multiple people such as three customer service reps within it and certain staff may be wearing multiple different hats. So when creating the structure, ignore the people involved and just identify the core business functions that must be performed. Again, first we want to create the right structure to support the chosen strategy. Then we can add roles and hats.

Structure done right. You should be able to instantly tell how to scale this business.

How to Read this Structure

At the bottom of the structure you’ll see an arrow with “decentralized autonomy” on the left and “centralized control” on the right. That is, your goal is to push decision-making and autonomy out as far as possible to the left of the structure for those functions closest to the customer. At the same time you need to control for systemic risk on the right of the structure for those functions closest to the enterprise. There is a natural conflict that exists between decentralized autonomy and centralized control. This structure recognizes that conflict, plans for it, and creates a design that will harness and make it constructive. Here’s how.

Within each function, you’ll see a label that describes what it does, such as CEO, Sales, or Engineering. These descriptions are not work titles for people but basic definitions of what each function does. Next to each description is its primary set of PSIU forces. PSIU is like a management shorthand that describes the forces of each function. For example, the CEO function needs to produce results, innovate for changing demands, and keep the team unified: PsIU.

Identifying the PSIU code for each function is helpful for two reasons. One, it allows a shared understanding of what’s really required to perform a function. Two, when it’s time to place people into hats and roles within those functions, it enables you to find a match between an individual’s management style and the requirements for the role that needs to be performed. For example, the Account Management function needs to follow a process and display a great aptitude towards interaction with people (pSiU). Intuitively you already know that you’d want to fill that role with a person who naturally expresses a pSiU style. As I mentioned earlier, it would be a mistake to take a pSiU Account Manager and place them into a Sales role that requires PSiu, give them a commission plan, and expect them to be successful. It’s against their very nature to be high-driving and high-charging and no commission plan is going to change that. It’s always superior to match an individual’s style to a role rather than the other way around. Now that you understand the basics of this structure, let’s dive into the major functions so you can see why I designed it the way I did.

The General Manager (GM) Function

The first and most important thing to recognize is that, with this new structure, it’s now clear how to scale the business. The green boxes “GM Vertical #1 and #2” on the far left of the structure are called business units. The business units represent where revenues will flow to the organization. They’re colored green because that’s where the money flows. The GM role is created either as a dedicated role or in the interim as a (hat) worn by the CEO until a dedicated role can be hired. Each business unit recognizes revenue from the clients within their respective vertical. How the verticals are segmented will be determined by business and market needs and the strategy. For example, one GM may have authority for North America and the other Asia/Pacific. Or one might have authority for the entertainment industry and the other the finance industry. Whatever verticals are chosen, the structure identifies authority and responsibility for them. Notice that the code for the GM/PsIU is identical to the CEO/PsIU. This is because the GMs are effectively CEOs of their own business units or can be thought of as future CEOs in training for the entire organization.

Underneath each green business unit is a Sales role, responsible for selling new accounts and an Account Management role, responsible for satisfying the needs of key clients. Essentially, by pushing the revenue driving functions to the far left of the structure, we are able to decentralize autonomy by giving each GM the authority and responsibility to drive revenue, acquire new customers, meet the needs of those customers. Each GM will have targets for revenue, number of customers, and client satisfaction. They also have a budget and bonus structure.

The Product Manager (PM) Function

To the immediate right of the green business units is a black box called “PM” or Product Manager. The function of the Product Manager is to manage the competing demands of the different verticals (the green boxes to its left) as well as the competing demands of the other business functions (the grey boxes to its right) while ensuring high product quality and market fit and driving a profit. The grey boxes to the right of the Product Manager — CEO, Finance, Operations, Engineering, Marketing Strategy, and Admin — represent the rest of the core organizational functions. Effectively, these functions provide services to the green business units so that those units have products to sell to their markets. The revenue that the business generates pays for those internal services. Profits are derived by subtracting the cost of those services from the revenues generated by the business units. A Launch Manager who helps to coordinate new product releases between the business units supports the Product Manager.

The code for the Product Manager is pSiU. That is, we need the Product Manager to be able to stabilize and unify all of the competing demands from the organization. What kind of competing demands? The list is almost endless. First, there will be competing demands from the verticals. One vertical will want widget X because it meets the needs of their customers; the other will want widget Z for the same reasons (and remember that this particular company’s strategy is to run multiple verticals off a single horizontal platform). Operations will want a stable product that doesn’t crash and integrates well within the existing infrastructure. Engineering will want a cutting-edge product that displays the latest functions. Marketing Strategy will want a product that matches the company’s long-range plans. Administration will want a product that doesn’t cause the company to get sued. The CEO will want a product that tells a great story to the marketplace. Finance will want a product that generates significant ROI or one that doesn’t require a lot of investment, depending on its lifecycle stage. So the list of inherent conflicts runs deep.

The reason we don’t want a psIu in the Product Manager is that at this stage of the company’s lifecycle, the innovative force is very strong within the founding team, which will continue to provide that vision and innovation in another role, new Vertical Development and R&D under Marketing Strategy (more on this later). Nor do we want a Psiu in the Product Manager function because a big producer will focus on driving forward quickly and relentlessly (essential in the earlier stages of the product lifecycle) but will miss many of the details and planning involved with a professional product release (essential at this stage of the product lifecycle).

It’s worth discussing why we want the product P&L to accrue to the Product Manager function and not the CEO or GMs. By using this structure, the CEO delegates autonomy to the GMs to drive revenue for their respective verticals and for the Product Manager to drive profits across all verticals. Why not give P&L responsibility to the CEO? Of course the ultimate P&L will roll up to the CEO but it’s first recognized and allocated to the Product Manager. This allows the CEO to delegate responsibility for product execution in the short run while also balancing the long-range needs of the product and strategy.

We don’t give the Product Manager function to the GMs at this stage for a different reason. If we did, the product would have an extreme short-run focus and wouldn’t account for long-run needs. The business couldn’t adapt for change and it would miss new market opportunities. However, the GMs will need to have significant input into the product features and functions. That’s why the Product Manager is placed next to the GMs and given quite a lot of autonomy – if the product isn’t producing results in the short run for the GMs, it’s not going to be around in the long run. At the same time, the product must also balance and prioritize long-range needs and strategy and that’s why it doesn’t report to the GMs directly.

If the business continues to grow, then one of the GMs will become the head of an entire division. Think of a division as a grouping of multiple similar verticals. In this case, the Product Manager function may in fact be placed under the newly formed division head because it is now its own unique business with enough stability and growth to warrant that level of autonomy. Remember that structures aren’t stagnant and they must change at each new stage of the lifecycle or each change in strategy. For this current stage of the lifecycle, creating a dynamic tension between the GMs, the Product Manager, and the rest of the organization is highly desired because it will help to ensure a sound product/market/execution fit. I’ll explain more of how this tension plays out and how to harness it for good decision making in the next article.

The Operations Function

To the immediate right of the Product Manager is Operations. This is the common services architecture that all GMs use to run their business. It is designed for scalable efficiency and includes such functions as Customer Service and Technology Infrastructure. Notice how all of these functions are geared towards short-run efficiency, while the business still wants to encourage short-term effectiveness (getting new clients quickly, adapting to changing requests from the GMs, etc.) within these roles and so it gives more autonomy to this unit than to those to the right of it. The code for Operations is PSiU because we need it to produce results for clients every day (P); it must be highly stable and secure (S); and it must maintain a client-centric perspective (U). It’s important to recognize that every function in the business has a client that it serves. In the case of Operations, the clients are both internal (the other business functions) as well as external (the customers).

The Engineering Function

Going from left to right, the next core function is Engineering. Here the core functions of the business include producing effective and efficient architectures and designs that Operations will use to run their operations. This includes SW Design, SW Development, and QA. Notice, however, that the ultimate deployment of new software is controlled by the Product Manager (Launch Manager) and that provides an additional QA check on software from a business (not just a technology) perspective. Similar to Operations, Engineering is also short-run oriented and needs to be both effective and efficient. It is given less relative autonomy in what it produces and how it produces it due to the fact that Engineering must meet the needs of all other business functions, short- and long-run. The code for Engineering is PSIu because we need it to produce results now (P) and to have quality code, architecture, and designs (S), and to be able to help create new innovations (I) in the product.

The Marketing Strategy Function

The next core function is Marketing Strategy. Marketing Strategy is the process of aligning core capabilities with growing opportunities. It creates long-run effectiveness. It’s code is psIu because it’s all about long-term innovation and nurturing and defending the vision. Sub-functions include new Vertical Development (early stage business development for future new verticals that will ultimately be spun out into a GM group), R&D (research and development), Marketing Execution (driving marketing tactics to support the strategy), PR, and People Development. A few of these sub-functions warrant a deeper explanation.

The reason new Vertical or Business Development is placed here is that the act of seeding a new potential vertical requires a tremendous amount of drive, patience, creativity, and innovation. If this function were placed under a GM, then it would be under too much pressure to hit short-run financial targets and the company would sacrifice what could be great long-term potential. Once the development has started and the vertical has early revenue and looks promising, it can be given to a new or existing GM to scale.

The purpose of placing R&D under Marketing Strategy is to allow for the long-run planning and innovative feature development that can be applied across all business units. The short-run product management function is performed by the Product Manager. The Product Manager’s job is to manage the product for the short run while the visionary entrepreneur can still perform R&D for the long run. By keeping the Product Manager function outside of the GM role, New Product Development can more easily influence the product roadmap. Similarly, by keeping the Product Manager function outside of Marketing Strategy, the company doesn’t lose sight of what’s really required in the product today as needed by the GMs. Similarly, if the R&D function was placed under Engineering, it would succumb to the short range time pressure of Engineering and simply become a new feature development program — not true innovative R&D.

The reason Marketing Execution is not placed under the GM is that it would quickly become a sales support function. Clearly, the GM will want to own their own marketing execution and he or she may even fight to get it. It’s the CEO’s role, however, to ensure that Marketing Execution supports the long-range strategy and thus, Marketing Execution should remain under Marketing Strategy.

The basis for placing People Development under Marketing Strategy rather than under HR is that People Development is a long-range effectiveness function. If it’s placed under HR, then it will quickly devolve into a short-range tactical training function. For a similar reason, recruitment is kept here because a good recruiter will thrive under the long-range personal development function and will better reflect the organization’s real culture.

The Finance & Admin Functions

To the far right of the organization are the Administrative functions. Here reside all of the short-run efficiency or Stabilizing functions that, if performed incorrectly, will quickly cause the organization to fail. These functions include collecting cash Controller (AR/AP), Legal, and the HR function of hiring and firing. Notice, however, that the Finance function is not grouped with Admin. There are two types of Finance. One, cash collections and payments, is an Admin function. The other, how to deploy the cash and perform strategic financial operations, is a long-run effectiveness function. If Finance is placed over Admin, or under Admin, the company will either suffer from lack of effectiveness or a lack of efficiency, respectively. It also creates a tremendous liability risk to allow one function to control cash collections and cash deployments. It’s better to separate these functions for better performance and better control.

The CEO Function

The top function is the CEO. Here resides the ultimate authority and the responsibility to keep the organization efficient and effective in the short and long run. The code for the CEO is PsIU because this role requires driving results, innovating for market changes, and keeping the team unified. By using this structure, the CEO delegates autonomy to the GMs to produce results for their respective verticals. The GMs are empowered to produce results and also to face the consequences of not achieving them by “owning” the revenue streams. The CEO has delegated short-run Product Management to produce a profit according to the plan and simultaneously balances short- and long-run product development needs. At the same time, the CEO protects the organization from systemic harm by centralizing and controlling those things that pose a significant liability. So while the GMs can sell, they can’t authorize contracts, hire or fire, or collect cash or make payments without the authorization of the far right of the structure. Nor can they set the strategy, destroy the brand, or cause a disruption in operations without the authority of the CEO and other business units.

The goal of structure is to create clarity of authority and responsibility for the core organizational functions that must be performed and to create a design that harness the natural conflict that exists between efficiency and effectiveness, short-run and long-run, decentralization and control. A good CEO will encourage the natural conflict to arise within the structure and then deal with it in a constructive way. More on how to do this in the next section.

Remember that within any structure, individuals will play a role and, especially in a start-up environment, wear multiple hats. How you fill roles and hats is to first identify and align the core functions to support the organization’s strategy. Then, assign individuals to those functions as either a role or a hat. In this particular structure, the role of CEO was played by one founder who also wore the temporary hats of GM Vertical #1 and #2 until a new GM could be hired. The other founder played the role of Product Manager, as well as Engineer until that role could be hired. Clearly delineating these functions allowed them both to recognize which roles they needed to hire for first so that they could give up the extra hats and focus on their dedicated roles to grow the business. Going forward, both founders will share a hat in Marketing Strategy with one focused on new Business Development and the other on R&D. These Marketing Strategy hats play to the strength of each founder and allow them to maintain the more creative, agile aspects of entrepreneurship while the business structure is in place to execute on the day-to-day strategy.

Summary of Organizational Structure & Design

To recap, design controls behavior. When an organization’s structure is misaligned, its resistance to change will be great and its execution will be slow. Organizational structures get misaligned over time for many reasons. The most basic of these is inertia, through which companies get stuck in old ways of doing things. When restructuring your organization, there are some classic mistakes to avoid. First, always redesign the structure whenever you change the strategy or shift to a new lifecycle stage (do this even if there are no personnel changes). Second, avoid placing efficiency-based functions such as operations or quality control over effectiveness-based functions such as R&D, strategy, and training. Third, avoid giving short-range functions like Sales, Operations, and Engineering power over long-range functions like Marketing, R&D, and People Development. Fourth, distinguish between the need to decentralize autonomy and centralize control and structure the organization accordingly. Finally, avoid placing the wrong style of manager within the new structural role simply because that’s the past precedent. Changing structures can be really hard because there’s so much past precedent. If the organization is going to thrive, however, the new structure must support the new strategy. In the next article, I’m going to discuss the most important process of any business: the decision making and implementation that brings the structure alive.

Need help designing and integrating a new organizational structure? Contact Lex for an initial consultation.

Next to The Most Important Process in Your Business: Or, How to Make Good Decisions and Implement Them Fast

WARNING: Vision & Values Can Kill Your Company

If a true conflict of vision and values exists within the organization, one side must go.
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There are few things that will destroy momentum within an organization like a conflict in vision and values. This article will explain why this is so, what to do if you have a conflict of vision and values, and how to align or realign a shared sense of vision and values throughout your organization. First, allow me to define what I mean specifically by vision and values.

Making Sense of Vision and Values

Vision is the destination. Values are how we do the work.

Vision is the destination or ultimate outcome the organization is collectively working towards. For example, imagine that you’re a sea captain. Vision would be the destination and outcomes you’re seeking from a successful voyage. Are you sailing to Tahaiti or Vancouver? And what do you hope to gain from a such a voyage? Knowledge? Treasure? Experience? Or simply a ride to a new place? If vision is the destination, then values are the norms of behavior that are deemed acceptable during the voyage. What kind of ship would you run? Would it be clean, orderly, and tight? Or would you sail like a loose band of pirates, with the only moral code to win treasure or walk the plank? How the work is done reveals the values you espouse.

The same concepts hold true for your company. To be effective, an organization needs a shared and compelling vision so that everyone buys into where the organization is sailing and why. The crew has bought into the vision; they understand their role on the voyage; and they’re eager and determined to make it happen. A company also must embody a shared code of values so that everyone is clear on the modes of acceptable behavior and, more importantly, what isn’t acceptable behavior — the kind that will get you walking the plank. Without a compelling vision and clear authentic values, a company will tend to flounder like a ship adrift at sea. It’s just not going to get very far very fast.

What Happens if There’s a Conflict of Vision and Values

A true conflict of vision and values is an extreme situation that can’t be negotiated. That is, if two or more people possess conflicting vision and values, then one of them must go (yes, that means leave the organization). Intuitively, this should make sense. For how can two groups of people get along and work together if they want to head in opposite directions or don’t value the same conduct? For example, if a couple no longer share the same vision and values for their relationship, no amount of counseling is going to save it. It’s best for both parties to part ways and find partners who do share their vision and values. Likewise, if two company co-founders have a genuine conflict of vision and values, one should buy out the other or they should agree to shut the company down. The organization is just not going to make it while that conflict exists. On a global scale, we have seen plenty of conflicts of vision and values in action. Communism and capitalism are perhaps the most flagrant 20th century examples. In cases like this, if one imposes itself on the other, the resistance to change is so great that this usually results in war. Conflicting vision and values are the major reason why peace between Israel and Palestine is so hard to negotiate. Both sides have a fundamentally different vision and values around co-existence. Until that conflict is resolved, no peace treaties, walls, terrorism, or sanctions are going to bring the sides together. However, with shared vision and values, all other conflicts become manageable.

Because it’s so extreme, your best course of action when you suspect a potential conflict of vision and values is to prevent that conflict in advance. There’s an old saying that when the head is rotten, it affects the whole body. Put another way, vision and values tend to flow from the top of the organization down. Therefore, you want to be extra vigilant that those in leadership positions have bought into a common set of vision and values and actually walk the talk. When this occurs, by their very presence, they naturally instill shared vision and values and help to cascade them throughout the organization. Here’s how you accomplish this.

How to Align Vision & Values

Dynasties are built by highly proficient leaders who buy into a shared vision & values.

The legendary football coach Bill Walsh used a simple formula to realign the vision and values of the San Francisco 49ers in the 1980s. When Mr. Walsh joined the 49ers, he was a former college coach in his first year of coaching professional football. At the time, the 49ers were infamous for being perennial losers. Nothing in the organization seemed to go right. Mr. Walsh intuitively knew that if he was going to create a Super Bowl champion, then he would first have to change the culture by instilling in his players a new vision and a new set of values. The model he created is powerful in its insight and simplicity. The first step in using it is to place all of your current staff in one of the four quadrants: those who share the vision and values and those who do not, and those who have high proficiency in their tasks (produce results) and those who do not.

DraftBoard

The Team Leaders in Quadrant 1 are those individuals who exemplify the best that your organization can be. They walk the talk. They embody the desired vision and values of your organization and, at the same time, they have a very high level of proficiency (e.g. their skill in sales, marketing, finance, programming, etc.). Think of them like your starters or team captains. When it comes to managing starters, you want to develop their capabilities and career paths for the long term. This is a strategic investment and a smart one. Your job as manager is to help them cultivate their own leadership qualities and find the career path that is most engaging and rewarding to them. Celebrate and honor this group. Include them in strategic planning and the new hire process. They can set the tone and tempo for your entire organization.

The Team Players in Quadrant 2 includes those individuals who exemplify the desired culture of your company but who don’t perform at the same level of proficiency as the starters. Think of them like your bench. When it comes to managing the bench, your job is to coach them and train them to improve their proficiency for the task at hand. Invest time, energy, and attention in this group for results today. It is relatively easy to develop proficiency in the short run but it is very, very challenging to develop character in the long run. You either have it or you don’t. Therefore, value those in Quadrant 2 and coach them in technical proficiency.

The Mercenaries in Quadrant 3 are those who perform technically at a very high level but who don’t align with the company’s vision and values. This is like a group of mercenaries or free agents. They are in the game only for themselves and everyone knows it. Be careful with this group. Use mercenaries sparingly and in areas that are non-critical for the business but require a specialized skill. But at all costs, do not put mercenaries in leadership positions. If you do, this will have an adverse effect on the entire culture. When it comes to managing free agents, your job is to motivate and create incentives that reward short-term performance. Pay them cash on the barrelhead for a job well done. But do not attempt to win them over by offering a career path, an equity stake, or a leadership position that unduly influences others.

The Waivers in Quadrant 4 include those who don’t perform at a high level and don’t share the desired vision and values of the company either. If this was a sports team, this is the group that you’d place on the waiver wire and hope to trade to your competition. There’s no real point in investing time, energy, and attention in improving skills or attempting to create a shared sense of vision and values. In other words, you can put lipstick on a pig, but it’s still a pig. Do yourself and that person a favor: help them find a new job with a different company that better aligns with their talents, vision, and values. You’ll both be better off.

Using a simple model like this matrix can help you quickly group the types of people in your organization and develop a short- and long-range plan to develop each one. It also brings tremendous clarity in identifying the types of starters you want to attract and what it takes to develop your bench. It also shows you the types of free agent mercenaries who you can use for selected tasks but that you shouldn’t count on to be around for the long term. Finally, this brings clarity to your waiver wire and the types of people who aren’t a good fit for your organization’s culture.

Remember, nothing creates greater misalignment in an organization and slows execution speed than a conflict of vision and values. Therefore, attempt to avoid misalignment by being clear and committed to a powerful vision and authentic values up front. Then fill leadership positions in your team with individuals that intrinsically share that same vision and core values. If you can do this, you’ll have smooth sailing ahead. But if you make the mistake of hiring people who don’t buy into the vision and values, you’ll end up facing mutiny or forcing key members to walk the plank.

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The Secret to Managing Everything

Life exists in patterns


The secret to understanding management is this: Complex adaptive systems (such as people and organizations) must (1) shape and respond to changes in the environment and (2) do so as whole organisms, including their parts and sub-parts. If they are unable to do so, they will cease to get new energy from the environment and will perish.

Intuitively, this makes sense. For example, imagine a family of four. If the family is to survive and flourish, it must shape the environment by getting resources such as money, food, and shelter. It must also respond to the environment, including to changes that are economic, societal, ecological, and so on. At the same time, it must pay attention to the all the parts that make up the family system – things like the act of cooking, cleaning, commuting, paying the bills, and taking the kids to school. It must take into account the different and often conflicting needs of the individual family members. It must also give focus to holistic dynamics so that the family acts like a single, unified whole – for example, making sure that there’s plenty of love, warmth, laughter, support, and nurturing for all of its members.

If the family isn’t able to shape or respond to the environment, or if it loses focus on the parts or the whole, it will quickly run into trouble. If the pattern continues, then the family will disintegrate. Just imagine a family that doesn’t have income, or a family that can’t perform its daily routine, or that can’t respond to new economic changes, or whose members are always fighting among themselves. Obviously, it’s not a family you’d want to be a part of. It is not resilient or adaptive to change. It costs all of its members more energy than they get in return. Such a family is on the precipice of complete failure.

The same is true for every organization. It must be constantly shaping and responding to change while focused on the parts and the whole. Therefore, I am going to classify observable behavior, at its most basic level, as either shaping or responding to change while focusing on the whole organization or on its parts or sub-parts. I call this the Adaptive Systems Model of organizational behavior.

The Adaptive Systems Model of organizational behavior

The dimensions of behavior within the Adaptive Systems Model exist on a relative and time-dependent scale. For example, if there’s a high drive to shape the environment, then at the same time, there will be a lower drive to respond to change. If there’s a high drive to focus on the parts, there will be a lower drive to focus on the whole. You can see this in your own life. Notice that, when the daily pressures and actions of work and life consume you, you’re also not simultaneously focused on the big picture. That’s why you periodically “get away from it all,” go on vacation, or take time out to get a new perspective. Notice too that if you’re busy building a new business, you don’t have the time and energy to respond to all the little vicissitudes of life, family, friends, and so on. As the farmer once said, “there’s a season to sow and a season to reap and they don’t happen at the same time.”

All behavior can be viewed and understood through this basic model. Note that I’m not talking about “good” or “bad” behavior, nor about why something is behaving the way it is – only that it is behaving along these relative dimensions. Now that you have an overview of the basic dimensions of behavior, you can use this framework to reveal some amazing insights into the people and situations you’re attempting to manage and to do it more effectively. Here’s how.

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How Square Went Against Popular Strategic Advice and Won

Square Payments followed a counter-intuitive strategy and so should you.

There’s a popular view among technology startups that a smart business strategy is to build a product that’s designed for the leading industry giant to acquire. It usually sounds something like this: “We’re building the next-generation router that Cisco will need to add to its product line. Our strategy is to build the product, get them to adopt it, and ultimately have them buy us out.” Like a lot of things in life, just because this view is popular, doesn’t mean it’s right. In fact, gearing your strategy towards the leading industry giant is usually dead wrong. Here’s why and how to choose a better strategy.

The Story of Square

You may have heard of a company called Square Payments, Inc. Square is a mobile payment solution company that allows anyone to accept credit card payments using their mobile phone. In just over a year since its launch, the company had nearly $1 billion in processed payments. It has recently accepted an undisclosed investment from Visa, the leading credit card processor. The insider consensus is that, if Square continues to execute its strategy, it will revolutionize how we pay for things in the real world. It could be as disruptive to payments as iTunes was to music. How did this all happen in such a short amount of time?

The story of how Square came to life is a great one. Square was created by Jack Dorsey (Jack also happens to be the co-founder and Executive Chairman of Twitter, but that’s a different story). When you learn the story of Square, it becomes clear that Jack didn’t start out to revolutionize the payments industry. His original goal was much more modest. Dorsey’s former boss and good friend (and eventual co-founder), Jim McKelvey, lost a sale for his hand-blown glass because he had no way of accepting credit cards. The problem was one many people had: the barriers to setting yourself up to accept credit card payments were too high. So Dorsey set about to see if he could create a better system.

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The Pre-Startup Checklist


Before a startup ever launches, you should have a checklist of critical items in place. These items have nothing to do with writing a business plan or forming the articles of incorporation. In line with the old saying “well begun is half done,” without these basic requirements, the venture won’t get off to a successful start. Even worse, ignoring this checklist can lead to your investing a lot of capital, time, and energy – only to find out that you’re doing the wrong thing, with the wrong team, at the wrong time.

The Real Difference Between Startup and Pre-startup

I’m going to define the core difference between startup and pre-startup using a single word: commitment. Commitment means that the entrepreneur and founding team have taken a real risk to make the business happen. They are clearly and unequivocally in. It’s Dodge City or Bust. Without commitment, the venture will remain stuck in pre-startup mode – as an idea that will never be actualized.

For example, I recently had coffee with an old colleague who wanted to talk about his new “startup.” He had written a business plan, registered a domain name, and was seeking advice on raising capital and building the technology. He was still working at his day job, where he planned to stay while building on the idea in his spare time. As we talked, I could tell that what he really wanted was someone with whom he could discuss the idea – to explore it further and get another perspective. He was still just trying it on and not yet fully committed.

You can always tell if someone is committed to a new venture by his or her actions. Have they taken a significant risk such as quitting their day job or putting their own money into it? Are they excitedly and constantly talking about the opportunity? Are people rallying around their cause and vision? These are all great signs of commitment – and that’s when you know you’re in startup mode. With them, a new business can be born and has a chance of success. Without them, you’re still in pre-startup or it’s a non-starter.

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The Stages of the Execution Lifecycle

Keep climbing the mountain


Navigating your company up the execution lifecycle 1 and keeping it in optimum shape is a great challenge. This article will show you how to do it successfully.

The stages of the execution lifecycle become easier to understand with a little pattern recognition. Basically, every business must shape or respond to its environment and it must do so as a whole organization, including its parts and subparts. If it doesn’t do this, it will cease to exist. Recognizing this, we can call out four basic patterns or forces that give rise to individual and collective behavior within an organization. They are the Producing, Stabilizing, Innovating, and Unifying (PSIU) forces. Each of these expresses itself through a particular behavior pattern. The combination of these forces causes the organization to act in a certain way.

The four forces of Organizational Physics.

Just like the other lifecycles, the execution lifecycle exists within a dynamic between stability and development. The basic stages of the execution lifecycle are birth, early growth, growth, and maturity and, from there, things descend into decline, aging, and death. The focus within the execution lifecycle should be to have the right mix of organizational development and stability to support the stages of the product and market lifecycles. That is, the lifecycle stage of the surrounding organization should generally match the lifecycle stage of the products and markets. If it’s a startup, the surrounding organization is the entire company. If it’s a Fortune 500 company, this includes the business unit that is responsible for the success of the product as well as any aspects of the parent organization that influence, help, or hinder the success of the product.

The stages of the Execution Lifecycle.

The surrounding organization should act a certain way at each stage of the product/market lifecycle, as you’ll see below. Note that, when a force is or should be dominant, it will be referenced with a capital letter:

• When piloting the product for innovators, the company should be in birth mode and be highly innovative and future-oriented (psIu)
• When nailing the product for early adopters, the company should be in early growth mode and be producing verifiable results for its customers (Psiu)
• When beginning to scale the product for the early majority, the company should be standardized and operations streamlined for efficiency (PSiu)
• When fully scaling the product for the early majority, the company’s internal efficiencies should be harnessed, as well as the capability to launch new innovations and avoid the commodity trap (PSIu)
• When milking the product for the late majority/laggards, the company should use the proceeds from the cash cows to launch new products into new markets that will in turn progress through their own PSIU lifecycle stages.

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Lifecycle Strategy: How to Tell if You’re Doing it Right

In my previous post, I introduced the product, market, and execution lifecycles and why a successful strategy must align them. Now we’ll take a look at the four key indicators that will tell you if you’re on the right strategic path. The key indicators, which must be taken into account at each lifecycle stage, are Market Growth Rate, Competition, Pricing Pressure, and Net Cash Flow.

Four key metrics guide the timing and sequence of your strategy: Market Growth Rate, Competition, Pricing Pressure, and Net Cash Flow.

Let’s take a visual walk around the figure above and see how the key indicators work. First, notice that when you’re piloting your product for innovators in quadrant 1 you should be in negative cash flow. The total invested into the product to date should exceed the return. The market growth rate should be low because you’re still defining the problem and the solution for the market. Therefore, the competitors within your defined niche should be few both in number and capabilities. Consequently, the pricing pressure will be high because you haven’t defined the problem or the solution, so you have no ability to charge enough money for it at this stage.

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Lifecycle Strategy: Product, Market, Execution Fit

A successful strategy aligns the stages of three lifecycles: product, market, and execution. (E) is new energy from the environment.

Everything has a lifecycle. It is born, it grows, it ages, and it ultimately dies. It’s easy to spot a lifecycle in action everywhere you look. A person is born, grows, ages, and dies. So does a star, a tree, a bee, or a civilization. So does a company, a product, or a market. Everything has a lifecycle.

All lifecycles exist within a dynamic between system development and system stability. When something is born, it’s early in its development and it also has low stability. As it grows, both its development and stability increase until it matures. After that, its ability to develop diminishes over time while its stability keeps increasing over time. Finally, it becomes so stable that it ultimately dies and, at that moment, loses all stability too.

Everything follows a lifecycle that is a tradeoff between development and stability.

That’s the basics of all lifecycles. We can try to optimize the path or slow the effects of aging, but ultimately every system makes this progression. Of course, not all systems follow a bell curve like the picture above. Some might die a premature death. Others are a flash in the pan. A few live long and prosper. But from insects to stars and everything in between, we can say that everything comes into being, grows, matures, ages, and ultimately fades away. Such is life.

What do the principles of adaptation and lifecycles have to do with your business strategy? Everything. Just as a parent wouldn’t treat her child the same way if she’s three or thirty years old, you must treat your strategy differently depending on the lifecycle stage. And when it comes to your business strategy, there are actually three lifecycles you must manage. They are the product, market, and execution lifecycles.

  • The product lifecycle refers to the assets you make available for sale.
  • The market lifecycle refers to the type of customers to whom you sell.
  • The execution lifecycle refers to your company’s ability to execute.

In order to execute on a successful strategy, the stages of all three lifecycles must be in close alignment with each other. If not, like a pyramid with one side out of balance, it will collapse on itself and your strategy will fail. Why? Because aligning the product, market, and execution lifecycles gives your business the greatest probability of getting new energy from the environment now and capitalizing on emerging growth opportunities in the future. (I discussed in a previous post that the goal of any strategy is to get new energy from the environment, now and in the future.) As you’ll see, aligning all three lifecycles also decreases your probability of making major strategic mistakes.

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