Making sense of your management model
Julian Birkinshaw and Jules Goddard explain how organisations can do a better job of using a management model to enhance their competitiveness
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Most organisations know what their business model is. But, few understand what a management model is and even fewer understand their own management model.
We often hear the term "management model" thrown around in discussions about organisational development and change, but most users of the term struggle to define what they mean. One colleague equated it to the distinction between top-down and bottom-up processes; another described hierarchical and networked structures as alternative management models.
These points of view are useful, but incomplete. A management model has many interlocking parts, relating to four key issues: how directions are set, how employees are motivated, how resources are allocated, and how decisions are made. When carefully formulated, a management model can become a source of competitive advantage. However, in many organisations the choice of management is subconscious or ill thought-out. Indeed, we would argue that the investment banks that got into trouble during the financial crisis did so partly because of their poorly chosen management models.
Last year's model
The term business model became popular during the dot-com boom. It basically refers to how a firm makes money - that is, the choices firms makes about their sources of revenue, their overall cost structure, and their make-or-buy options. We view the term management model as complementary: it refers to the choices firms make about what happens inside the organisation - how the work of management gets done, and therefore how value is added in the marketplace.
Some firms are discovering that a distinctive management model can itself be a key driver of its competitiveness. A couple of case studies from previous editions of Lab Notes illustrate this point:
- Happy Computers is a $6 million IT training company in London founded by Henry Stewart. With a failed start-up -a newspaper News on Sunday - under his belt and an affinity for people, Stewart set out in the mid-1990s to build a great company built on a distinctive set of management principles. Managers are chosen according to how good they are at managing ("our most radical idea") and they are openly appraised by their own employees; new recruits are never asked for qualifications, and are chosen according to how well they respond to feedback on their training style; mistakes are celebrated; client satisfaction, currently at an industry-leading 98.7 per cent, is the single most important performance indicator. Happy sells its training courses for £200 per day more than double the £90 per day its competitors charge. And while the industry has contracted by 30 per cent over the last six years, Happy's revenues have doubled.
- Topcoder is a $20 million Boston-based software company founded by Jack Hughes in 2000. Software projects from clients are broken down into modules, and each module is opened up to Topcoder's community of 120,000 programmers as a competition. Programmers are invited to complete the project within a set period of time. A typical contest may have 10-20 programmers participating. The developers of the best solution win a financial prize -typically in the tens of thousands of dollars- and the losers get nothing. Hughes understood that for many top programmers the chance of winning a prize is far more motivating than being paid a steady salary. So by creating a tournament-based model for structuring work and rewarding effort, he was able to tap into their intrinsic desire for peer recognition. Topcoder is growing fast, and is attracting high levels of visibility in the open source software community.
Happy and Topcoder share some interesting features. Their success cannot be explained simply in terms of distinctive products or services-in fact their products (IT training, software development) are the same on paper as those of hundreds of other companies. And business-model thinking only takes you so far: Happy's business model is identical to those of its competitors; Topcoder has a somewhat-distinctive business model borne of its flexible cost base, but it would be a grave injustice to explain the firm's success solely in these terms.
Instead, we suggest that these two firms are doing well because their founders have chosen to think creatively about their management models. They have made conscious and unusual choices about how to set objectives, motivate people, and coordinate work, and these choices have in turn had a dramatic impact on the quality, responsiveness, and cost of the services they offer.
The dimensions of a management model
There are four basic activities of management on which a management model can be built, with two polar points of view, or principles, for how each set of activities is delivered:
Choices about the nature of the objectives the firm pursues. Do managers have a clear set of short-term goals for the firm? Or do they pursue an oblique path through the definition of a higher-level and longer-term set of objectives?
Choices about how individuals are motivated to pursue these objectives. Do managers attempt to hire and retain good people by making extrinsic rewards, such as salary, benefits, and bonuses attractive? Or do they focus on intrinsic rewards such as the opportunity to contribute to society, a feeling of achievement, or peer recognition?
Choices about how activities are coordinated in the firm. Do managers focus on using formal and well-structured management processes to deliver outputs? Or do they encourage a process of informal and spontaneous coordination through mutual adjustment?
Choices about how decisions are made in the firm. Do managers take personal responsibility for decision making, and rely primarily on their own deep knowledge and experience? Or do they prefer to tap into the disparate knowledge of their subordinates and assign collective responsibility?
Figure 1: A framework for dimensionalising management
In all four cases, the principles on the left-side of the spectrum are immediately recognisable; and taken together they might be viewed as the "traditional" model of management. But this does not mean all firms should be seeking to move away from this model-it has served large successful firms such as Exxon and Wal-Mart well for decades. But by understanding the spectrum of choices available, executives should be in a position to make more enlightened decisions about whether and how to change. (For a discussion of the details of each of these dimensions interested readers should refer to our article "What's your Management Model" in Sloan Management Review, Winter 2009.)
Core themes
Three core arguments underlie our thoughts about management models:
- A management model involves choices at the level of the management principles that then shape the specific practices and behaviours in the firm. Because these principles are invisible and rarely made explicit, we are often unaware of the management models we are working within.
- By understanding the management principles operating in firms, and the alternatives that exist, it is possible to make conscious changes to our management models that can be enormously beneficial to competitiveness.
- There is no one best management model, and there is no old set of principles that need to be replaced by a new set. Rather, there are choices to be made, and the appropriate choice depends on a host of circumstantial and competitive factors. Firms who generate competitive advantage out of their management model are the ones that make conscious and distinctive choices about what principles to follow.
These are timeless arguments, but there are also good reasons why they are particularly important today. Three sets of forces are causing firms to get to grips with these issues in ways that haven't before. One is the changing expectations of employees, particularly the so-called Gen Y employees, who are demanding more humane, flexible, and fun workplaces. The second is technological change, and in particular the emergence of "Web 2.0" technologies that enable peer-to-peer collaboration and information transfer in ways that were simply impossible ten years ago. And the third is the emergence of new competitors, often from emerging economies like India, who do not necessarily start from the same traditional principles of management that Western economies have taken for granted.
We believe there is real value in getting to grips with your organisation's management model. At very least, it allows you to surface implicit assumptions about the choices you have made; and hopefully it will also help you to make better choices in the future.
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Julian Birkinshaw (jbirkinshaw@london.edu) is co-founder of the Management Innovation Lab at London Business School and Jules Goddard is an associate of MLab. This article is condensed from their forthcoming articles "What's your Management Model" in Sloan Management Review, Winter 2009.
