Kotter and McGrath on management structures for change

In my weekly book post for s+b's blog, both John Kotter and Rita Gunther McGrath argue that change will inevitably overwhelm hierarchical management systems, but their solutions differ:

Alternative Systems for Corporate Survival
Change, according to Harvard Business School professor emeritus and change management expert John Kotter, is coming faster than ever. And that’s a big problem because change is the great destroyer of corporations.

In Accelerate: Building Strategic Agility for a Faster-Moving World (Harvard Business Review Press, 2014), Kotter argues that companies cannot adapt to change mainly because of their hierarchical management systems. These systems are designed to coordinate large groups of people in the consistent and efficient delivery of products and services—and they do it well. They are, Kotter says, “absolutely necessary to make organizations work.”

Here’s the conundrum: You can’t jettison the hierarchical system that runs your business, but if you don’t, it could kill your company. The very strengths of the hierarchical system become fatal flaws when swift change is required, Kotter says. It slows down communication and the flow of information. The policies, rules, and procedures that govern its workings become barriers to change. Its main focus—the maintenance of business as usual—takes precedence over new business. And the siloes, complacency, and habitual behavior it spawns inhibit new strategic initiatives and innovation. Earlier this year, in an interview with strategy+business, Rita Gunther McGrath discussed this same idea. As an example, she highlighted Kodak’s inability to adapt to the digitization of photography, which led to the 120-year-old company’s bankruptcy in 2012.

So what do you do? In her book, The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press, 2013), which Walter Keichel picked as the best strategy book of 2013, McGrath suggests setting up different management systems for different businesses. Core businesses need the hierarchal management system that is focused on efficiency and wringing out every dollar of profit before change inevitably forces you to sell them off or just close them down. Emerging businesses need a more entrepreneurial management system, which is designed to move fast and capture new opportunities.

Kotter has a different prescription. He thinks that both management systems can exist within the same business as a “dual operating system.” Behind the hierarchical system is a secondary system that has a network structure with multiple nodes and connection points, and is charged with executing strategic initiatives. This network has “no bureaucratic layers, command-and-control prohibitions, and Six Sigma processes” and it is “populated by a diagonal slice of employees from all across the organization and up and down its ranks,” writes Kotter. Thus, the people in the network system are simultaneously working in the hierarchical system.

Both these solutions suggest that the Shiva-like destruction of companies is not inevitable. But that doesn’t mean that we’re going to see lots of companies living to Methuselah-like ages. McGrath identified only 10 companies out of all publicly held firms that she thinks have demonstrated an ability to weather the storms created by fleeting competitive advantage. Kotter doesn’t name any of the companies he uses as cases in his book, but in his YouTube video, he says that only “0.001 percent” of companies currently have a dual operating system in place.