A new perspective on human nature, particularly on human needs, allows us to develop a dynamic model of the organization and an integrated top-down-bottom-up approach to management. Some of the major benefits of the resulting holistic inside-out-outside-in view include expanding the boundaries of the organization, bridging the gap between plan and execution, and increasing the owner's power in the management process.

[Update 1/5/2014: A new "children's book for adults" that describes the set of theories presented here is now availble as a free iBook on the Apple iBookstore. See "Spointra and the Secret of Business Success (The Aged Edition)" at http://www.bizbigpic.com/cristianmitreanu/2014/01/spointra-and-the-secret-of-business-success-the-aged-edition.html.]

Problem

"As a society, we were simply advancing toward understanding how to successfully perform increasingly larger sets of activities over increasingly longer periods of time. Unfortunately, what should have been a natural progression of our general understanding of business was diverted by historical circumstances on a dead-end road of knowledge. The quest for a fundamental theory of business was replaced by the quest for a theory of sustainable competitive advantage. Consequently, every effort to understand what it takes for a company to achieve enduring success was hampered by limitations inherent to the concept of strategy." This quote from my 2009 essay "A Wake-Up Call for the Business Nation" provides a high-level overview of the problem.

"We are approaching the end of an era," said David A. Garvin of Harvard Business School in 2010, while talking about the future of business education (http://hbswk.hbs.edu/item/6363.html). Gary Hamel, who detailed many aspects of the "management 1.0" problem in his book "The Future of Management," has even taken the initiative to start this very project (Management Innovation eXchange) in an attempt to provide a fix. Also, it is important to mention that Henry Mintzberg has been sounding the alarm, so to speak, for a long time now -- he "wrestled" with Harvard's strategic planning champions (particularly, Michael E. Porter) numerous times in some of the top management journals. But simply pointing out to the problems associated with the top-down, plan-then-execute approach to management, without providing an alternative, has small chances of changing the status quo. And in this respect, Thomas Kuhn's concept of paradigm shift (http://en.wikipedia.org/wiki/Paradigm_shift) provides some insight into why we are dealing with a significant undertaking here.

Unfortunately, this is not just an academic sparring match. Many venerable companies are being destroyed in front of us not because of some unforeseen outside forces, but mainly because of their leadership team's surprisingly poor understanding of how businesses work. In the early two thousands, Motorola was riding high, primarily driven by the success of its cell phone RAZR. Just a few years later, the company had to be broken down into pieces in order to survive. Its management had aggressively pushed and discounted the phone, inadvertently accelerating its commoditization, while failing to follow up with a higher-value offering. It was an episode that shares many similarities with what happened to IBM in the early nineties, when they focused too much on the PC business. The list goes on and on, but lacking a sound understanding (read "theory") makes even the exercise of framing a mistake difficult. As a result, many executives get a "free pass" and continue to enjoy their mystical status, while the rest of the world has a hard time even perceiving that there is a problem (other than the rather-superficial problem of individual greed and lack of ethics).

While Prof. Hamel brought together a group of management thinkers to identify the moonshots that serve as guidance for the MIX initiative, I believe that the business world's main problem is its reliance on an obsolete way of thinking. A more comprehensive, more realistic theory of (understanding and doing) business would address most of the issues identified and articulated as the MIX moonshots, as most of them actually flow from the "philosophy" issue. (The list of moonshots is not mutually exclusive and collectively exhaustive, containing overlaps and causal relationships that should be discussed at one point.)

Solution

As indicated above, the solution presented in this hack is a theory of (understanding and doing) business that provides a more comprehensive and realistic explanation of how organizations fundamentally work. To concisely illustrate its value, it is useful to momentarily think about physics. So, we know that, to analyze and understand the dynamics of a system of objects, we need to analyze all the movements within that system in relation to the same frame of reference (http://en.wikipedia.org/wiki/Inertial_frame_of_reference). Think of two objects laying on the floor of an elevator. Relative to the elevator, the two objects are at rest; while relative to the ground, the objects are moving up and down, following the motion of the elevator. However, if we analyze one object in relation to the elevator and the other one in relation to the ground, we get a rather confusing view of the system formed by the two objects, with one being at rest and the other moving. Similarly, we use systems of reference in business, as we attempt to understand where things have been and where they are going. Products (as well as the competition or industries associated with the products) and a company's resources (also variations like competencies and capabilities) are the most common systems of reference. Unfortunately, while the former tends to have a short life and a limited scope, the later tends to have a fuzziness associated with it that severely limits its usefulness. The theory introduced here solves this problem by providing a system of reference rooted in human nature, thus transcending time, geographies/cultures, resources, as well as offerings (generic term for products, services, or combinations of the two).

I will describe the new theory as it was built block-by-block, using a few slides from my 2006 presentation "A Fundamental Theory of Business" (http://www.redefiningstrategy.com/TheoryOfBusiness.pdf). These slides are up for some slight refinement, but they should be enough to get the point across. I will also try to do my best in explaining the aspects that have been refined since these slides were put together in 2006.

1. A NEW THEORY OF NEEDS AND HUMAN BEHAVIOR

The foundation of the new theory is a new perspective on human nature. It was detailed in my 2007 article "A Business-Relevant View of Human Nature" (http://www.redefiningstrategy.com/HumanNature.pdf). Also, as I mentioned in the "Challenges" section, these findings are supported to a large extent by decades of academic research (see the review papers on subjective well-being and on goals, respectively). In brief, the new view begins with the finding that human beings are constantly striving to address an over-arching need, generically labeled "successful existence" (you can also think of it as the life goal). This need includes all the other needs, and changes constantly in a simultaneous top-down and bottom-up manner. This process leads to the disaggregation of the need "successful existence," based on the knowledge associated with the subordinated needs. So, when we think holistically about the need "successful existence," we have the least knowledge about it (as it relates to the rest of the needs, which are included in it). To deal with that, we begin breaking it down into smaller parts, of which we have better knowledge. The result, for a particular individual at a given time, can be visualized as an inverted tree of needs, with the lowest need-associated knowledge at the top and the highest need-associated knowledge at the bottom (see slide below and note that for a while I used the term "issue" instead of "need," a choice that is discussed in my 2007 article mentioned above).

For a teenager, at one point in time, the need "successful existence" might be roughly described as "I want to be a rock star." That could include the need "music school," which can be defined more clearly. And it could also include the need "guitar," which is far clearer and thus located lower in the tree of needs. Nonetheless, it is important to understand that all the needs in the tree of needs are, in fact, possible ways of framing the needs. Although we do deal with a process of cascading disaggregation (i.e., Need AB = Need A + Need B), the tree actually shows possible combinations of needs. Think of a square divided by 2 horizontal lines and 2 vertical lines into 9 smaller squares. Now, we can state with certainty that the larger square is composed of 9 smaller squares. But if we try to find out how many squares we have there, then we can identify an additional number of 4 2x2 squares. In other words, the need "guitar" is included in the need "music school" as well as the need "rock star."

The tree of needs stretches from the lowest knowledge to the highest knowledge associated with the needs. It is a continuum. However, while the exact amount described by "lowest" or "highest" will vary over time and from one individual to another, the basic behaviors employed to address needs along this continuum is the same. At the top, humans disaggregate the need "successful existence," while at the bottom, needs are created to match existent offerings. In between, though, humans employ a combination of the two behaviors. So, now we can talk about a continuum of disaggregating-matching behavior (in the past I used the term "problem solving behavior," but that's a much broader concept and could create ambiguity). This is the system of reference that will be used to analyze and further our understanding of the business world. And to make it easier to discuss (identifying the exact position of a need on the continuum is rather difficult), I identified and divided the continuum into three zones: Defining Fundamental Needs, Designing Need-Offering Pairs, and Matching Existent Offerings -- a convention that becomes useful later.

2. A NEW UNIT OF ANALYSIS FOR BUSINESSES

As I mentioned earlier, an individual's needs change constantly, whether that is because of the interaction with the environment, reflection, or other factor. So, trying to identify them is futile. However, because humans tend to live in lasting communities and in the same environments for sizable lengths of time, they tend to share not only needs but the knowledge and behaviors associated with them. As a result, it is possible to see the world as a collection of virtual business spaces, defined by an offering and a set of customers, who share the same knowledge and dissagregating-matching behavior associated with the need corresponding to that particular offering. (Note that the same customer can be associated with several other tofmos.) On the continuum (which in the slide below is oriented horizontally), all transactions that take place in such virtual business space appear clustered, allowing us to see the space as a single lasting entity. Termed tofmos (a word derived from total-offering-market-cosmos, with the same form for singular and plural), these units of analysis can also be used to analyze entire economies, as I illustrate in the section "Practical Impact." However, when analyzing organizations or businesses, the concept of tofmos is not sufficient. That is why it is important to inroduce the concept of ofmos (term derived from offering-market-cosmos), which is basically the slice of a tofmos associated with a single vendor or organization.

Another important characteristic of the two units of analysis is that their position on the continuum of disaggregating-matching behavior changes over time. They move lower, toward the "higher knowledge" end of the continuum. As knowledge about the offering is shared and increases within the community, the associated need is being pushed lower within the tree of needs. Driven by the natural urge to make the most of the available resources and circumstances, humans continuously adjust the need "successful existence" and add new idealistic needs at the top of the tree of needs, while pushing the existing needs lower. So, while the offering's functionality and complexity increases over time (a pressure exerted by the vendor), the need associated with the offering is gradually stripped down to a clear set of requirements for core features. That is why even though the average cars today are far superior to many high-end cars several decades ago, the actual value or functionality provided to the user is lower. Over time, the need addressed by the the car, as an offering, has become more specific and functional, making room for other needs that are increasingly unique and valuable to each individual.

This process is called commoditization, and it is important to note that the commoditization of an offering should always be discussed in relation to a set of customers. Unlike the conventional explanations -- "Commoditization is the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers" (http://en.wikipedia.org/wiki/Commoditization) -- this new insight shows why things happen the way they happen.

3. A NEW PERSPECTIVE ON ORGANIZATIONS

Building on the findings detailed above, it is possible then to see organizations as continuously-changing collections of commoditizing ofmos. Each ofmos has a unique life span (different than the concept of product life cycle, which tracks the life of a product indiscriminately based on the associated financial results; the new concept provides a more granular view, as any change in an offering or its distribution method, for exmple, could be seen as the creation of a new ofmos), a commoditization speed, and a stream of revenue and profit associated with it. Note that the vertical axis on the Offering Map illustrated in the slide below should be changed to Offering's Complexity (or Functionality), with low at the bottom and high at the top. As an ofmos commoditizes from right to left, there is also a slight upwards movement, which can be ignored for now.

4. A FRAMEWORK FOR SUCCESS

It's true that not all businesses are created and managed to become lasting successful organizations. Many of them are managed to be sold. If that's the case, then they should be ran as projects -- with goals, deadlines, and available resources. And the existent knowledge in this area is quite solid. However, if the goal is to create a lasting organization that is healthy (at least, cash-flow positive for extended periods of time), the theory detailed here provides a valuable, more realistic framework that could be used for guidance. As I explain in the section "Challenges," this framework does not guarantee success. It is a rather probabilistic guide that increases an organization's chances of achiving and maintaining success over the long run. At its core, the framework contains the concept of alignment between an organization's Focus and its Center. While the Focus refers to the intended way of doing business in relation to the continuum of disagregation-matching behavior, the Center is defined by the collection of ofmos that generate the majority of the revenue. Over time, the Center (the emerging way of doing business) tends to follow the commoditization of the defining ofmos, getting out of alignment with the organizations Focus (the top-down, intended way of doing business). This leads to various internal conflicts, which eventually will negatively affect the company's performance. So, the management team must constantly add and delete ofmos in order to maintain this alignment.

The framework for success has four steps or levels, on which the management team must gradually focus. First, the leadership must make sure that the organization is customer centric. More information about this can be found in my 2005 article "Next-Generation Customer-Centricity" (http://www.redefiningstrategy.com/NextCCentricity.pdf), which was published by MarketingPower.com, the American Marketing Association's website. Second, the leadership team must add and discard offerings, as well as enter and exit markets, in order to maintain the alignment between the organization's Focus and its Center. The third step is to achieve and maximize synergies. And finally, the fourth step is management at the ofmos level.

Practical Impact

Some of the major benefits that the new theory brings to the business world include:

PROVIDING A MORE COMPREHENSIVE AND REALISTIC "BIG PICTURE"

As mentioned in the hack's title, the new theory provides a unified, top-down and bottom-up, approach to business management. It also allows us to see businesses holistically, integrating the inside-out and the outside-in perspectives. The concept of ofmos allows us to integrate the concept of customer and that of market -- traditionally, we talk about an organization's portfolio of offerings and its portfolio of markets, without having a clear way to bring them together. Finally, it provides a dynamic view of the organization. To see this perspective in action, so to speak, watch the short video entitled "Strategic Vision a la Spointra" (the first video embeded at the bottom of this page, and also available at http://www.youtube.com/watch?v=30R2IfTznTM).

INCREASING THE POWER OF THE OWNER (PRINCIPAL) RELATIVE TO THE MANAGEMENT TEAM (AGENT)

To quote Wikipedia, "In political science and economics, the principal-agent problem or agency dilemma treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent, such as the problem of potential moral hazard and conflict of interest, in as much as the principal is -- presumably -- hiring the agent to pursue the principal's interests. [...] The principal-agent problem is found in most employer/employee relationships, for example, when shareholders hire top executives of corporations. Political science has noted the problems inherent in the delegation of legislative authority to bureaucratic agencies" (http://en.wikipedia.org/wiki/Principal-agent_problem). This remains a significant problem. However, the enhanced big picture generated with the help of the new theory could be seen as a step toward the "CEO-less organization." If you watch the video mentioned above or play the video game prototype mentioned in the section "First Steps," it is easy to see how the animated representation of the organization's portfolio of ofmos on the Offering Map could eventually morph into a dashboard. Such development would enable owners to have a higher involvement in or control of the organization's management (i.e., big decisions could be made collectively by a team, instead of a CEO).

REDEFINING THE ORGANIZATION

Using the new theory and the visualization that stems from it, it is easy to see that some of the ofmos have a short life span. Eventually, organizations will be able to predict quite accurately the length of the ofmos life span. As a result, they will be able to say, ahead of time, how many resources will be needed and for how long. Which means that a sizeable number of employees will only be needed for a limited time. In short, the boundaries of the organization will become rather blurry. So, we will see organizations moving towards a structure that features a smaller core (core employees, core resources) and a rather large "temporary" component (outside contractors, partnerships, etc). And, of course, such development points to the rise of the "temporary talent and resource management" function (organizations will have to treat their "temporary" component with increased seriosity, as the share of revenue and profits associated with it will grow increasingly larger) and the independent contractor -- a trend that has already begun. Nonetheless, these trends will have to be supported by the goverment, a discussion that I will touch upon below, when I talk about a new economic worldview.

PROVIDING ADDITIONAL INSIGHT INTO VARIOUS BUSINESS PHENOMENA

In the section "Solution," I described the new take on the phenomenon of commoditization. In addition to commoditization, the new theory allows us to understand innovation from the customer value perspective -- in fact, commoditization and innovation are the two opposing forces that fuel the dynamics of the business world, both being underlied by humans's striving to address their needs. In the 2008 blog post "Deeper Insight Into Disruptive Innovation" (http://www.bizbigpic.com/cristianmitreanu/2008/06/deeper-insight-into-disruptive-innovation.html) I provide a new perspective on the concept of disruptive innovation (http://en.wikipedia.org/wiki/Disruptive_technology). And there are other areas and concepts, where the new theory provides additional insight. A good example is the area of negotiations, where the new theory of needs provides further insight into how the "non-adversarial bargaining" (http://en.wikipedia.org/wiki/Getting_to_YES) works -- higher-level and lower-level needs, as opposed to interests and positions.

OPENING THE WAY FOR A NEW APPROACH TO BUSINESS EDUCATION

"Since 1959, business schools have taken a more analytical and discipline-based approach than before," says Prof. Garvin in the same interview that I mentioned in the section "Problem." To understand how far this discipline-based fragmentation goes, it helps to look at the Harvard collection "Business Fundamentals Series Set" (http://hbr.org/product/business-fundamentals-series-set/an/6655BN-BUN-ENG), which include Competitive Strategy, Finance for Managers, Financing Entrepreneurial Ventures, Information Technology for Managers, Leadership for New Managers (2nd Edition), Marketing Strategy, Negotiation, New Product Development, Reading Financial Reports, Sales Management, Understanding Consumer Behavior, Understanding Costs, and Managing Human Resources. And that is a rough reflection of how business education is structured. Good luck putting all that together into a coherent "big picture!" The concept of strategy emerged as a response to that problem, but its roots in the military body of knowledge took us in the wrong direction. As a result, most people are left to their own devices when it comes to put together all the disparate pieces of the puzzle.

The concept of strategy is in fact the latest materialization of the business community’s search for a universal formula for enduring corporate success.But there is only that many ways of shuffling these pieces and that goes for how the associated knowledge is delivered too. In my recent blog post "Powerful Quick-Fix for the MBA" (http://www.bizbigpic.com/cristianmitreanu/2011/02/powerful-quick-fix-for...) I wrote, "as we wait for a new theory that would allow us to integrate currently disparate concepts and generate a more realistic business big picture, there is one easy and powerful solution for the MBA program: introduce a mandatory class of history of business and economic thought." And indeed, the theory presented here has the capacity to not nly integrate disparate concepts, but also to provide an initial skeleton, on which more detailed knowledge can be laid.

But there is only that many ways of arranging these pieces, and that goes for how the associated knowledge is delivered too. In my recent blog post and MIX hack "Powerful Quick-Fix for the MBA" (http://www.bizbigpic.com/cristianmitreanu/2011/02/powerful-quick-fix-for-the-mba.html) I wrote, "as we wait for a new theory that would allow us to integrate currently disparate concepts and generate a more realistic business big picture, there is one easy and powerful solution for the MBA program: introduce a mandatory class of history of business and economic thought." And indeed, the theory presented here has the capacity not only to integrate disparate concepts, but also to provide an initial skeleton, on which more detailed knowledge can be laid. This approach has the potential to broaden the scope of business education horizontally (to individuals not typically interested in studying business) as well as vertically (to individuals of lower age).

PROVIDING A NEW ECONOMIC WORLDVIEW

Although this hack is not about economics, the new theory of needs and the continuum of dissagretating-matching behavior provides the foundation for a new economic worldview as well. Like an organization can be seen as a collection of commoditizing ofmos, so an economy can be seen as a dynamic collection of commoditizing tofmos. What we get is a rather Schumpeterian model, where to role of the government is to maintain a smooth process of "creative destruction" (http://en.wikipedia.org/wiki/Creative_destruction). The model shows why neither the Smithian view nor the Keynesian view works in the long run. The first one, which could be simply described as "free market" or "small government," naturally leads to the accumulation of wealth in the hands of a few, phenomenon that threatens social order and democracy. The second one, which could be summarized as "government intervention when the economy goes through a downturn," has the tendency to maintain the status quo. The new worldview provides a "smart (not small, not large) government" solution, in that it suggests that the government should incentivize the creation of high-level innovations (important distinction!), while ensuring that organizations of which offerings have become obsolete transition out smoothly. This indicates at least one thing, and that is the fact that the government should ensure some sort of social net or protection that would support entrepreneurship (potential source of high-level innovations) as well as employee mobility (preventing companies to grow to "too big to fail" levels). Nonetheless, this is a whole new discussion. For an overview of the new economic model, the video "Enabling Individual Freedom and the Pursuit of Happiness" provides a good introduction (the third video embeded at the bottom of this page, and also available at http://www.bizbigpic.com/cristianmitreanu/2008/11/enabling-individual-freedom-and-the-pursuit-of-happiness.html).

First Steps

A few steps that could be taken immediately (in ascending order of impact and required resources):

1. PROVIDE WORKSHOPS ON THE NEW THEORY OF NEEDS

"If you understand cause and effect, it brings about a set of insights that leads you to a very different place. The knowledge will persuade you that the market isn’t organized by customer category or by product category. If you understand the job that consumers need to complete, you can articulate all of the experiences in that job," said Clayton Christensen of Harvard Business School in an interview with Inc. magazine (http://www.inc.com/tech-blog/one-simple-question-to-unlock-unbeatable-marketing-clayton-christensen-interview.html). The theory of needs presented here provides a deeper insight into the customer's "jobs that need to be done." Exposing an organization's most employees to the new knowledge will better prepare them to understand and constructively deal with business phenomena like innovation, commoditization, convergence.

2. PROVIDE WORKSHOPS ON THE NEW THEORY OF BUSINESS

Workshops that expose those in leadership roles to the new concepts presented here and the resulting "big picture" would most likely help them think holistically about the business. Instead of using the conventional case method (http://en.wikipedia.org/wiki/Case_method), real business situations should be discussed, focusing on intent as much as on emergent trends and phenomena. This should help cement the theoretical concepts.

An additional tool that could complement the workshop, and which is is somewhat in works at this point, is the casual video game OFMOS, which mimics the process of running an organization over extended periods of time. The game has the potential to further develop the mindset associated with the new theory. The screenshot of the prototype, copied below, gives an idea of the game mechanics. The player acts as the company's CEO, exploring the nine sectors of the Offering Map. Then, based on the sector-specific information, he or she must decide whether to add an ofmos there, delete one, or do both. And all this under the constraint of time and resources. The prototype is available for download (no web-based or mobile verion yet) at www.ofmos.com, where a recorded runthrough is also available (also embeded at the bottom of this page, as the second video).

3. REFINE THE INFORMATION FLOW

The next step would be to refine the information flow throughout the organization in such way that the knowledge about customers and their needs is captured and shared easily.

4. MAKE STRUCTURAL CHANGES

Finally, a more significant step would be to alter the organizational structure. A marketplace or hub for customer knowledge could be created. And to make sure that the initiative doesn't fall on deaf ears, a Product Manager could be assigned to run and champion the new internal service.

Videos

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September 6, 2016 at 10:11pm

Maryann Farrugia

Of course new perspective and dynamic model solutions can help have a great approach in business management. The thing is in a business you need to expand your horizon in order to fix and have a successful business management. Creating a new plan and execution will close the gap of your management and it can increase your power in handling management processes.

Maryann Farrugia CEO ( Visit Our Website )