1. General
The dynamic capabilities framework outlined above and elaborated in Chapter 1 recognizes certain levels of dependence between the organization and the individual. In particular, if the CEO and the management team fail to perform well with respect to sensing, seizing, and then transforming, performance failure at the enter- prise level is likely. All stakeholders associated with the company are in varying degrees harmed by such failures. If labor markets are efficient, individuals can be redeployed. However, given that value is likely to be at least partially enterprise specific, the value that a worker has in one organizational setting will be different from another. There is no guarantee, therefore, that value will be preserved when employees are displaced by lack luster enterprise financial performance, and possibly, even failure. Of course, if labor markets are inefficient, the ease with which labor can be redeployed is likely to be reduced.
The modern corporation with dynamic capabilities is both exposed to change and is an instrument of change. As discussed, the managerial task is substantially entrepreneurial: to sense op- portunities; then put knowledge and capital to work by seizing upon opportunities; and then responding to the competition that will inevitably follow success. The enterprise will need to develop a distinct culture (of innovation) to succeed.
Economic performance is the first responsibility of business. A business that does not earn its cost of capital is problematic—it wastes society’s resources, and it puts constituencies—including employees, suppliers, and customers—at risk. It is irresponsible for an enterprise to accept discretionary social responsibilities that impede its capability to earn its cost of capital.
In today’s world with knowledge-based enterprises competing vigorously, the role of the individual in the enterprise is also different from what was once the norm. The nineteenth-century employer believed, with some justification, that the employee needed the business enterprise more than the business enter- prise needed the employee. Not so with respect to skilled employ- ees today. It is the enterprise’s job to excel at recruiting and retaining top talent. Economic power is now weighted towards the individual if the individual has exceptional skills. Moreover, highly talented individuals do not want to be employees in the traditional sense. Such individuals seek and receive greater workplace auton- omy, and typically accept greater accountability. Machine operators in a factory could be told what to do. Exceptional talent will not hesitate to tell management where to go if they perceive that management is “out of line”. Exceptional talent generally does not need to be supervised, and does not accept traditional supervision. Such talent can dictate, in some circumstances, what they will con- tribute to the organization and the surplus, if any, that will be left for other stakeholders. The traditional employment relationship, with the worker receiving directions in a command-and-control hierarchical structure, simply does not work for such highly skilled individuals.
Accordingly, when the modern organization employs many highly skilled individuals, it has to create an organization of near equals, of colleagues, and associates. The modern knowledge-based organization cannot organize with traditional boss/subordinate dichotomies. It must be a relatively flat structure, with distributed leadership, and self-organizing teams. Of course, every member must act as a responsible decision-maker within their professional domain.
2. The Importance of Interdependence
In dynamically competitive talent-based firms, it is universally accepted that people are important. This perspective actually has its roots in the industrial world. Robert Owen, the successful textile manufacturer in Scotland, published a tract in 1813 advising his fellow manufacturers to care for their people “at least as well as their industrial equipment”.
There is also a common adage in talent-based firms that your assets go down the elevator every day. This is true; but why do they generally come back the next day? The answer is not just because there is work to do, but because each needs the other in the organization. Individuals are often specialists, being very good at certain things. Society has learned that we can have more of everything by specializing; but the price of specialization is depend- ence on others. At least in professional service organizations, but also in hospitals and research centers, there is the split in function between literati and managers. The former produce knowledge, the latter help organize the talent and apply the results. Both need each other. Exceptional talent is likely to own the “means of production” which is specialist knowledge. However, exceptional talent can benefit from being a member of an organization, and capturing the benefits from interacting with colleagues.
Indeed, both research and development, professional services, as well as many other kinds of business services are quintessentially businesses of specialists. In either type of organization, individuals can leverage each other more than in organizations populated by generalists. For instance, those in professional services firms who are good at finding work need others to help execute on projects. Likewise, those who are good at doing the work need others to help find it. Those who are good with data need others to help them access data. Those who have the skills to access and organize data need others to analyze it. Projects can be made bigger and more challenging if other colleagues with complementary skill sets can be trained or recruited. Clients are generally happier if the organizations can integrate the work of disparate specialists, relieving the clients themselves of the burden of doing so.
3. Reputations, Brands, and Individual Names
Brands and names help bring awareness of the service provider, and also become a proxy for reputation. Good brands have great value as they reduce sales costs and help sustain premium pricing. Indeed, brands serve as trustworthy consumer advisors. In some sectors of the economy, customers do not rely just on brands and reputation; they also care about individual “names”. Accordingly, the reputational capital of individuals can be an important asset. Repeat customers usually want to know who is going to be the service provider. Sophisticated clients know that even in organiza- tions with reliable procedures and a strong culture for the provision of quality, performance at least to some extent depends on the identity of the team leader, and possibly the key staff as well. In essence, this means that in the specialized services sector branding is really a kind of quasi cobranding—the “name” of the team leader and the firm’s brand together help sell services. This means that traditional conceptions of the employment relationship must be modified.
In Ronald Coase’s (1937) and many other relatively traditional conceptions of the employment relation, employees “agree to obey the directions of the entrepreneur within certain limits”. The employee lets the entrepreneur/manager direct his activities within that zone because the entrepreneur is assumed to be better at providing direction than the worker. If the entrepreneur does this better than the price system, then this provides the rationale for internal organization. The entrepreneur/manager is placed at the apex of a hierarchy so as to properly exercise control over resource allocation and skills. Inside the zone of indifference, the worker does not care about the tasks to which he or she is assigned.
Unfortunately, the Coasian conception, while interesting, is not able to handle with ease the exceptionally talented or “expert” employee. In the Coasian firm, the boss must know as much as the talented individual if the boss is to provide direction inside the employee’s zone of discretion. This is clearly difficult if not impossible. Moreover, the exceptionally talented individual’s “zone of discretion” is likely to be quite narrow. Accordingly, Coase’s view of the employment relation does not appear to fit a firm endeavoring to provide expert services.
Alchian and Demsetz’s (1972) analysis of the employment rela- tion was different from that of Ronald Coase’s and it is in some ways more relevant to high-end specialized services firms. Their claim is that the raison d’etre of the firm is team production. According to them, managers do not have any power of fiat or authority that the marketplace does not have. It is no different for the employer to deal with employees each day than for the consumer to deal each day with the neighborhood baker. There is no need in their model for the employee to surrender control, as is necessary in the Coasian firm. Rather, the firm is a place where productivity-enhancing team behavior takes place. The existence of the firm flows from its ability to provide for coopera- tive activity superior to that available in a market setting. Managers monitoring team behavior (as in Alchian and Demsetz’s (1972) manual freight-loading example), detect shirking, and align rewards so that they reflect performance.
However, Alchian and Demsetz (1972) are skeptical that high- end specialized services can be organized under traditional employ- ment structures because of imperfect monitoring of individual per- formance. As they put it:
while it is relatively easy to manage or direct the loading of trucks by a team of dock workers when input activity is so highly related in an obvious way to output, it is more difficult to manage and direct a lawyer in the preparation and presentation of a case. (p. 786)
Because of these problems, they predict that professionals will be less likely organized as capitalist firms. Others have suggested the partnership form is the response to this problem, as partners can monitor each other.
The Alchian and Demsetz (1972) model has been criticized because it equates the employment relation to a commodity trans- action. Their approach does not apply perfectly to the manage- ment of exceptional talent, but elements are recognizable. First, to the extent that there are hierarchical elements amongst high- end professionals, it is the professionals who hire “bosses” rather than the other way around. The Hollywood agency model for creative talent was an early manifestation. As explained by Albert and Bradley (1997), the stars themselves beginning with Newman, Streisand, and Portier broke away from the studios to create their own production company, First Artists. A key element of First Artists’ strategy was to create a climate in which leading actors could control their professional environment and lives. As Albert and Bradley point out, Steve McQueen, who joined First Artists shortly after it was founded, was able to choose the director and producer for his first film produced by First Artists. The artists did not manage themselves. They put a professional manager in place; but the manager mandate was clearly to effectuate the artist’s view of how a film should be produced. There have been many independent production companies founded since, with varying degrees of success. As a result, the balance of power in Hollywood has shifted from the studios to the talent.
University faculties have some similar attributes. The faculty arguably hire their Dean since the Dean generally serves at the sufferance of the faculty, at least in the major research universities in the USA. The basic point in both the Hollywood studio and university faculty situations is that as compared to an industrial setting, the “power” relationship between “bosses” and “workers” is arguably inverted, turning the traditional model (bosses direct workers) on its head.
In short, experts and other types of creative and highly skilled knowledge workers, be they medical doctors, professors, engineers, or economists, desire high autonomy and can be self-motivated and self-directed because of their deep expertise. The university environment caters for this with the tenure system—requiring the discharge of teaching, research, and service obligations by faculty, but allowing the individual faculty member considerable discretion as to whether and when (other than meeting class) tasks are performed. Authority is usually perceived as anathema, in part because it has two indirect and largely hidden costs:
- it can readily be found overbearing by the skilled individual, who if incentivized correctly, may not need and does not want supervision and close monitoring;
- the perceived subjective nature of performance measurement allows managers to exercise wide discretion on compensation, particularly bonuses, allowing and encouraging lobbying and other influence costs which is debilitating to all, except perhaps those who wield the authority.
There is, of course, a connection between the amount of auton- omy provided (job design) and the nature and type of incentives and rewards. In traditional organizations, prohibitions, rules, and directives and their monitoring generally must increase as compen- sation is uncoupled from clear objective performance metrics. As it becomes easier to measure the employee’s (agent’s) performance, the employee’s (agent’s) autonomy can be increased, without loss of efficiency.
Both industrial and service firms face challenges associated with the exercise of authority, but the demand for autonomy by individuals is likely to be greater in the services context, thereby amplifying the problem. The challenge is to find ways to effectuate cooperation and avoid conflict. If service firms can indeed provide satisfactory ways of objectively measuring performance, they then can provide greater autonomy by using incentives. With better incentive alignment, firms can begin a virtuous circle of work freedom and high reward.
4. Weaknesses in Traditional Managerial Models
In many business enterprises, it is often assumed that author- ity is the indisputable means of managerial control. Often the implicit assumption in high authority commercial structures is that employees are lackadaisical, not particularly trustworthy, perhaps not too smart, and therefore need to be closely monitored and supervised and threatened with punishment to get them to behave properly and put forth adequate effort toward the achievement of project and company goals. A case can be made that the hierarch- ical and authoritative nature of some organizations is more suited to the characteristics of adolescents, not adults, and certainly not the literati.
Moreover, financial rewards are allocated in the traditional model in ways that are usually highly subjective. Competition takes place to establish oneself at a senior position in the orga- nizational hierarchy, as this affords the ability to control others while simultaneously affording protection against being subject to control by others. Seniority in the hierarchy allows more personal freedom, control over discretionary resources, and is the confident path to higher compensation. Because pay is not metrics-based, the politics of pay become part of everyday life. People jostle to claim credit, even at the expense of colleagues. A good deal of time and effort is spent posturing in order to appear valuable to the organization, through the eyes of the boss. Eventually the need to do excellent work usually gets lost sight of, and the company suffers performance difficulties.
The effective co-option and productive employment of excep- tional talent cannot always be achieved by traditionally organized and managed firms. New arrangements are needed and are being developed to guide, integrate, and make more productive the autonomous but interconnected work of highly skilled people. The organizational structures that result may indicate how to reorga- nize industrial firms too. As Tom Peters has noted, “The profes- sional service firm is the best model for tomorrow’s organization in any industry.”14 In order to understand the implications for the way firms need to be organized and the employment contracts that need to be struck, it is necessary to review some fundamentals of the marketplace for top talent.
5. The Literati in the Dynamically Competitive Enterprise
The contemporary workforce has always contained individuals with high education and/or exceptional talent. The economic sig- nificance of the literati has become more important as markets expand and intangible assets grow in importance. The growing importance of knowledge as a source of competitive advantage means that specialized talent is becoming more important (Albert and Bradley, 1997: 4). Robert Reich (2002: 107) has also noted that talented and ambitious people can earn more, relative to the median wage, than could talented and ambitious people in the industrial era.
Larger and more open or “contestable” markets are the reasons why dispersion in earnings has increased. The higher rewards top talent can command stem from the value which now seems to flow from the creative, analytical, and “rainmaking” abilities of leading professionals. In particular, the skill to help solve complex prob- lems, to help make critical decisions, or solve complex disputes, commands high value. It is not just research scientists, engineers, designers, athletes, movie stars, musicians, and film producers who can earn these rewards. It is also other types of professionals and consultants like lawyers, financial analysts, turnaround specialists, and even former government officials and economists.
Managing exceptional talent requires a unique approach to human resource management. Certain behavioral assumptions need to be employed, including the following:
- The literati like their work and need minimal direction. They desire to work hard, achieve the highest possible professional standards, and are willing to accept responsibility for their own actions.
- The literati respond to financial incentives. If one gets the financial incentives right, then many aspects of organizational life will be rela- tively easy. Get them wrong, and it will be difficult to coax actions out of employees, literati, or otherwise, that run counter to their incentives.
- The literati are worthy of trust and are not instinctively opportunistic.
While economic theory may sometimes assume that individuals are opportunistic—and there are undoubtedly many opportunis- tic people in society—in an organizational context, it is unlikely to be productive for management to act as if the literati are deceitful or burdened with guile. Making positive, but realistic assumptions about individual behavior is likely to turn out to be self-fulfilling.
The literati also have important non-pecuniary goals. Besides advancement, they want to belong to an organization they trust and respect. They also seek the approval of their colleagues. Accordingly, achieving “identification” and “commitment” with their employer has very positive motivational implications. The literati also want and deserve the freedom to excel. If they have such freedom, they will commit much more of themselves to solv- ing problems, doing the best they can in their daily work, being great colleagues, and building understanding relationships with both colleagues and clients, all the while maintaining the highest standards of professionalism.
With the literati, the role of management is to influence, encour- age, and mentor where necessary. The literati need to be given freedom, responsibility, and support. Management must not be authoritarian or bureaucratic. That is not to say that the organi- zation should be without rules. Permissive management is not an antidote to the weaknesses of excessively hierarchical structures.
To function productively, even the literati must learn to work cooperatively in teams. However, teams can be non-traditional. Teams can change with each project. It is desirable to keep project teams small, but intense and intimate. Teams need not emphasize consensus and compromise; rather, the aim should be to achieve excellence while giving some degree of rein to individualism. Cer- tain especially creative and exceptionally talented individuals can be given special recognition. Hence, team building with the literati is somewhat different from certain aspects of everyday team build- ing based on their skills. Such teams have been called “virtuoso teams”.15 Table 7.1 summarizes some of the differences between traditional teams and virtuoso teams.
In dynamically competitive knowledge-based organizations, leadership should be exercised by people at all levels. Leadership skills include initiating action, planning, problem solving, initiating necessary communication with colleagues and management. A critical element of leadership is accepting responsibility.
Table 7.1. Key differences between traditional teams and virtuoso teams
In short, the lines between managerial and non-managerial work are becoming blurred. Indeed, as project work requires col- laboration amongst people with different skills, requirements for horizontal relationships among diverse groups, sometimes includ- ing professionals outside the enterprise, demands on leadership expand.
The distributed leadership approach is not an abdication of man- agerial responsibility. It is just the opposite. The executive leader- ship team should be responsible to the Board and to shareholders, as well as to employees and other constituents. Any “power” that individual leaders have should stem from professional and personal respect gained through professional success and through creating and maintaining an open, honest, and transparent culture.
To summarize, exceptional talent is unlikely to be productive and satisfied in a traditional hierarchical organization, being compen- sated in traditional ways, and having compensation put at risk for events beyond their control. Dynamically competitive enterprises must develop new ways of compensating exceptional talent, and a (new) way of organizing the daily business so as to enable the highest quality of service to be provided. Table 7.2 tabulates some of the ways in which traditional firms are likely to be different from dynamically competitive ones, at least in the services sector.
Table 7.2. Contrasting views of the business enterprise
Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.