Petzinger, Thomas. "A New Model for the Nature of Business: It’s Alive!". Wall Street Journal February 26, 1999, B1.

 

A New Model for the Nature of Business: It’s Alive!

Forget the Mechanical—Today’s Leaders Embrace the Biological

 

BY THOMAS PETZINGER JR.

Staff Reporter of THE: WALL STREET JOURNAL

 

MOST PEOPLE THINK factories should run with machine-like precision, but not Charlene Pedrolie. After becoming manufacturing chief at Rowe Furniture of Salem, Va., she tore apart the assembly line and sent gluers, staplers and seamstresses madly scurrying to build sofas as they saw fit. Amid the pandemonium of the shop floor, productivity and quality shot through the roof. Major corporations jealously, track every dollar and proscribe the actions of every employee, right? Wrong, in the case of the family-owned Koch Industries of Wichita, Kan. Operating mainly in energy and agriculture—industries performing poorly almost everywhere else—Koch has grown bigger than Microsoft, Coke or McDonald’s in sales, with no budgets, no central planning and no fixed job descriptions.

 

Economic pundits say small-time middlemen are toast in a high-tech economy. But they haven’t met Jerry “the Seal Man” Whitlock, who buys and sells more than $1 million a year of seals and gaskets world-wide, mostly over the Internet from a spare bedroom in his house.

Business is at war with family life, people say. But not at a chain of used-book outlets called Half Price Books. It has become the largest used-book dealer in the U.S. by expanding into cities where employees and family members have a personal reason to move.

For the last four years I’ve been investigating such rule-breaking success stories in The Front Lines column for this page. But as the case studies piled up-my travels took me to more than 100 cities in 30 states to industries as far-flung as semiconductor design and grease recycling—the unusual seemed more and more like the norm. Everywhere I turned, it seemed, people were succeeding in business by doing the exact opposite of what business had long counted as conventional.

Was it possible that these offbeat leaders were becoming the new order of business? Was I witnessing a new ethos or simply some new fads? A new dawn or some new Dilbert fodder? The arrival of a new day or simply the ascendancy of a new generation? These questions forced me to consider business on an unfamiliar new level. What were the most fundamental forces guiding business?

The answers convinced me that a revolution was indeed at hand, more powerful than even globalization, technological change and other headline-grabbing pressures. Yet this great change is difficult to see because it involves the very act of seeing itself. It is a revolution in the model upon which people in business create and interpret their worlds.

Mental Models have awesome power in how we shape our economic culture and institutions. “You don’t see something until you have the right metaphor to let you perceive it,” said the historian Thomas Kuhn. Or as Einstein noted, “Our theories determine what we measure.” Until recently, businesspeople saw their worlds through the Industrial Age metaphor of the machine and built their organizations accordingly. Now, in irreversibly increasing numbers, they see business more as a living system. And in the process they are leading business back to its roots as a natural and fundamentally human institution.

No one has considered the origins and nature of business more deeply than William C. Frederick, emeritus professor of business administration at the University of Pittsburgh, who is best known for establishing business ethics as a serious course of study three decades ago. With a background in both anthropology and economics, Dr. Frederick has spent years tracing business to the beginnings not just of man but of life itself. All living things, he showed in a landmark 1990 study, harbor an impulse to economize, to accomplish more with less. This is life’s bulwark against the universal propensity toward the loss of energy and form, the unstoppable force called entropy. “This economizing process is the only way to survive, grow, develop and flourish,” says Dr. Frederick. “Overall, life on earth has been a roaring economizing success story.”

The genes that create us humans have programmed us for business, “the main economizing vehicle on which organized human life depends,” Dr. Frederick says. Trade, technology and the division of labor, the three foundations of business, all predate agriculture, government, religion, law, symbolic communication and probably every other organizing social force except the nurturing of progeny. Homo erectus mined quarries for stone tools 1.4 million years ago. Language itself may be a byproduct of the strive for efficiency: Some researchers believe tool-making helped to create the neural connections necessary for speech.

Our economic identity is stamped all over our language and culture. The earliest known examples of cuneiform writing involved business transactions almost exclusively, from livestock to olive oil. In many ancient languages, the word equivalent of “business” shares the same roots as “life.” A 3,000-year-old Chinese character for business translates as “life with meaning.” In old Sanskrit, “man” was derived from a word meaning to weigh, value, count out, or share.

From time to time, of course, kings, potentates, slaveholders and others with might on their side attempted to control economic activity from the top. But for most of human history, from the hunter-gatherer era forward, organizing for efficiency was a bottom-up affair. “The market is not an invention of capitalism,” Mikhail Gorbachev once said. “It is an invention of civilization.” He could have gone further: Civilization is an invention of business, and business is an invention of life.

If humans are naturally endowed with economizing skills, how did business become so impersonal? Why were the uncoordinated actions of individual entrepreneurs agglomerated into major corporations that turned people to cogs? The answer begins with the apple—not Eve’s, but Isaac’s.

From the 1680s onward, Sir Isaac Newton was the new Moses, presenting a few simple equations—the “laws of nature”—that never failed in predicting the tides, the orbits or the movement of any object that could be seen or felt. Output was exactly proportional to input. Everything was equal to the sum of its parts. Newton’s mechanics seemed so perfect, so universal, they became the organizing principle of all post-feudal society, including armies, churches and economic institutions of every kind. The very equations of economics, including many in use today, were built explicitly on the principles of mechanics and thermodynamics, right down to the terms and symbols. The economy was said to have “momentum,” was “well oiled,” was “gaining steam.”

For most of the Industrial Age the model worked, in large part because it so perfectly fit the technology of the time. In an era of railroads and steam engines, economizing best occurred through gargantuan size, which created the need for capital, which in turn created the need for corporations. The many diverse functions around which smalltime entrepreneurs had once self-organized came under central corporate control. The resulting lower costs meant higher profits, which attracted still more capital, which further increased the production runs. Mass production gave way to mass merchandising, which gave way to mass media.

This linear, mechanical model shaped every aspect of economic intercourse. Because matter and energy could be neither created nor destroyed, workers and owners were locked in a struggle over resources and wealth. Jobs, like machines, became ever more specialized and repetitive; the whole, after a11, was always the sum of its parts. History’s first management consultant, Frederick Taylor, argued a century ago that all possible brain work should be removed from the shop.

As a model for everything, Newtonianism, it turned out, had a problem: It worked only within the narrow range of Newton’s instruments. The “laws of nature” fell to pieces in space, as Einstein’s relativity showed, and at the subatomic level, as quantum physics showed. Scientists realized that however useful in solving smooth, mechanical problems, Newton’s calculus was meaningless in understanding the vast preponderance of nature: the motion of currents, the growth of plants, the rise and fall of civilizations. (Mechanics could explain why the apple fell, as the physicist Per Bak once quipped, but not why the apple existed, much less why Newton was thinking about it.)

The story of the physical sciences in the 20^th century, no different from the story of art, literature and music, is one of qualities taking their place alongside quantities, relationships taking their place with objects, ambiguity taking its place with order.

Except in business. Business (and government, the business of state) slept through every minute of the postmodern awakening. Leaders skilled at control became the leaders of modernity: GM’s Alfred Sloan, the United Mine Workers’ John L. Lewis, the Pentagon’s Robert McNamara, ITT’s Harold Geneen, American Airlines’ Robert Crandall. The mainframe computer, housed in its off-limits and tightly sealed glass house, accelerated centralization. Economics departments and M.B.A. programs (with calculus invariably a prerequisite) taught quantitative methods that continued to treat the workplace and marketplace as clockware: Pay a seamstress another penny and she will produce five more units an hour, add $1 million in national advertising for a predicted increase in sales. Management’s job was assembling the right pieces, pointing them toward the optimum and making sure the system never wavered.

This law-like consistency blinded perfectly kind and decent human beings (and some less kind and decent) to any purpose of organization life other than the optimization of the organization itself. “We are not in business to conduct moral activity,” IBM Chairman John Akers declared in 1986. “We are in business to conduct business.”

Into the moral void came numbers, only numbers. Optimization demanded intense measurement; all measurements could be abstractly converted to dollars; and profit thus became the entire ethos of business. Whereas previous generations of business leaders had considered themselves builders, by the end of the infamous 1980s business existed for no purpose other than fulfilling a compulsive search for “shareholder value.” This was a valid pursuit, to be sure, except that it had come to deny all other expressions of value.

By that time, fissures were already appearing in the mechanical model, though economic expansion had papered them over. In the 1960s, feminism and the civil-rights movement exposed the failure of monolithic control in institutions of all types, while the ecology movement emphasized interconnectedness over one-way causality. In the 1970’s, the Arab oil embargo proved the futility of forecasting, while the war in Vietnam showed that input in bombs didn’t always equal output in enemy deaths. In the 1980’s, the savings-and-loan debacle, the foreign-debt crisis,  and the insider-trading scandals revealed the limitations of leverage, a mechanical business concept if ever there was one.

Then came a great awakening, a sense that people are gifted with the instinct to innovate, collaborate and economize; that through countless local actions, whether in corporations, communities or entrepreneurial confederations, they create global order without central control. What brought these timeless human values back to the fore? Though the trends had been building for years, history may identify the catalyzing event as the Persian Gulf War of 1991.

It was a time of economic crisis. Business activity world-wide screeched to a halt, first as everyone glued his eyeballs to CNN and then as everyone realized no one else was spending a dime. A swift recession followed, but this one was different. Choking on excess capacity built up in the ‘80s lust for market share, businesses didn’t simply decide to furlough workers until the good times returned. This time they jettisoned them forever, institutionalizing a concept called downsizing. And this time the victims, to an unprecedented proportion, were managers, people who had occupied the precincts of ambition (and who, unlike the blue-collar people who preceded them, found their pockets bulging with severance pay). Like a dandelion gone to seed, the corporate world released these progeny to the wind, filling lobby directories and Yellow Pages with a teeming census of small companies filling niches of ever-narrowing size.

Thus the economic pundits have failed to identify a vital source of the nearly eight-year expansion following the Gulf War recession: Economic power and decision-making are now distributed over a vastly more numerous and diverse population, reducing the odds that a failure in one corner of the economy will drag down others.

Of course, the biggest mergers in history occurred in the late 1990s, but these signaled erosion rather than accretion of economic power. Consolidation mainly engulfed distribution industries (oil, telecommunications, financial services) whose products had been reduced to commodities. The economy’s most creative and value-added functions—especially software engineering, the fastest-growing industry in the world—remained chiefly in small organizations. (Bear in mind that Microsoft is much more a marketing operation than a technology creator.)

Also, right around 1991, economic pressures combined with technological forces through the widespread adoption among businesspeople of the so-called graphic user interface, or GUI, which endowed the kludgey personal computer with liberating simplicity (at least when it wasn’t crashing). Just as all those downsized executives were thrown into their spare bedrooms to pioneer in the new economy, an easy-to-use tool met them there, a back-office-in-a-box as well as a looking glass into the global economy. This explains, for instance, how a punkadelic artist in Minneapolis known as Chank Diesel could go from homelessness to a Horatio Alger story by selling his font designs over the World Wide Web.

Nineteen ninety-one was also a threshold year for technology inside large organizations, which for the first time spent more money on computing than all other equipment put together. This signaled the breakup of the mainframe computer, once accessible only to its anointed brotherhood, into millions of desktop units, which not only tapped the intelligence of everyone in an organization but redistributed it to everyone else.

Also in the early 1990s, downsizing and technology combined to accelerate a third mammoth trend: outsourcing. The functions that big outfits had brought in-house to seize on scale economies were now driven back out to an entrepreneurial economy hard-wired for quick and low-cost response. In the 1937 work for which he won the Nobel Prize, the economist Ronald H. Coase reached the wildly hypothetical conclusion that “in the absence of transaction costs, there is no economic basis for the existence of the firm.” In this era of virtual corporations and one-to-one marketing, the firm itself is becoming quaint.

Which leads to another of the forces converging in the early 1990s: the advent, not through central design but through global deregulation, of a new universal infrastructure, a common-carrier network providing small economic players with access to all other players. In addition to the Internet there was cheap overnight delivery, sky pagers, international direct-dial, real-time desk-top video conferencing, and, when nothing but a handshake would do, super-saver fares that put you anywhere in the U.S. for $199 and almost anywhere in the world for a small multiple of that. All this explains how Jake Albright and his son-in-law Bill Dudleston, working from a garage next to an Illinois grain elevator, could sell their hand-made stereo speakers at $10,000 a pair to customers in Japan.

Though powerful in their own right, the economic and technological trends of the early 1990s were amplified by demographic changes. Baby boomers—the best-educated and most independent generation in world history, reared on Dr. Spock, demand feeding and Jefferson Airplane—entered their 40s and reached the ranks of senior‘ management in great numbers. Reared to “question authority,” as a popular bumper sticker once urged, the boomers continued this practice even after the authority was theirs. Thus did a Lucent Corp. manager named Lynn Mercer give production workers the right—not just the right, but the duty—to improve the efficiency of any process in the plant she managed.

Gender compounded the effects of generation. In the early 1990s, women became part of the membership and leadership of major companies while also forming new businesses in record numbers. Work and family life, artificially cleaved in the Industrial Age, began to reunite as more people worked at home and as more workplaces encouraged flexible hours.

“Our business is all mixed up with our family life,” says a publisher named Mary Ellen Hammond, who with her husband, Jim Parham, runs a company called Milestone Press from the mountains of Almond, N.C., all as three-year-old Sidney scampers around (just as children of earlier eras watched their parents slop livestock, measure out dry goods and pound anvils). Meanwhile ascendancy of minorities in entrepreneurialism and corporate leadership, though halting, broadened the diversity of viewpoints within and between organizations. And then came the so-called Generation X, whose upbringing via daycare and divorce created a new kind of wariness toward institutions, accelerating both the drive toward entrepreneurialism and the change movement within corporations.

It would be ludicrous to imply that all companies or businesspeople, or even most, have abandoned the old command-and-control ethos. Conformity and compliance remain the unwritten rule at many major corporations, perhaps most. Many small-business people cannot shake their self-image as the prey in an economy full of predators. What’s more, many of the trends passed off as new are only the same old principles dressed up in new jargon. What good is “open-book management” when the books tell the wrong story? “Empowerment,” the most patronizing business buzzword to come along in years, perpetuates the backward and harmful notion that an all-knowing management anoints workers with purpose and initiative.

But while the old order persists, the new order is rising quickly and is poised to overtake it—haltingly in some places, unevenly in others, but inexorably in every corner of the economy. How can I be so sure that the Newtonian model is giving way to the natural one? Two reasons. For one, the marketplace leaves companies with no choice. In an era when change arrives without warning and threatens to eradicate entire companies and industries overnight, organizations can survive only by engaging the eyes, ears, minds and emotions of all individuals and by encouraging them to act on their knowledge and beliefs. Second and far more importantly, the new, more enlightened way of business will persist because it hews more closely to what we are as humans.

A century ago the pre-eminent scholar of American history, Frederick Jackson Turner, published his essay “The Problem of the West.” The frontier expansion, he wrote, was “a history of evolution and adaptation,” the story of “organs in response to a changed environment.” Amid such possibilities, he said, “freedom of opportunity is opened and new activities, new lines of growth, new institutions, and new ideals are brought into existence.”

Today’s pioneers are businesspeople, some in search of riches, others in search of freedom, all in search of the new. Unlike the Wild West of old, the new frontier is not one of place. It is a frontier of technologies, ideas and values. Ironic, isn’t it, that this advance is returning us to what business was always meant to be?

 Journal Link: To read three chapters from the book, and to join a live discussion with Tom Petzinger on Friday at 1 p.m. EST, see The Wall Street Journal Interactive Edition at http://wsj.com