Gary Hamel, the Godfather of Management 2.0, on reengineering the DNA of organizations based on, among other things, the principles of markets.

Gary Hamel is a one-man army on a mission: to rid corporations and CEOs of complacence and sloth. Part strategist, part crusader and orator par excellence, Hamel has for the past three decades, trained his guns on the biggest culprit of them all: antiquated management ideas and practices that lead organizations into a downward spiral, and ultimately into irrelevance. His prescriptions, though radical, are often the bitter pill that organizations need to jolt them out of their deep slumber. If you want sugar-coated advice, Gary Hamel’s not the guy for you.

While his early books Competing for the Future (co-authored with C.K. Prahalad—the two coined the now-legendary term of core competence) and Leading the Revolution were about strategic innovation and competition, his new books The Future of Management and What Matters Now touch upon a more fundamental theme that few management theorists dare to explore—the need to change the very building blocks or DNA of organizations and usher in what he calls Management 2.0.

“I could see many organizations found strategic renewal very difficult. They often hung on to an old strategy long after the point it was starting to produce diminishing returns,” says Hamel, a professor at London Business School. “I began to realize that there was something very deep inside organizations that made innovation difficult and made renewal difficult.”

In Part 1 of this interview, Hamel, who ranked 19 on the 2013 Thinkers50 ranking of the best management thought leaders, talks about how and why traditional management models need to be reengineered, an idea that’s core to his latest book What Matters Now.

Q. In your latest book, you say that existing management models need to be reengineered so that they’re based on market principles. Why is that so important?

A. There’s really a two-part question there. First, do we need to reinvent management? Second, what are the principles we should use in doing so?

Over the last 30 years, I’ve done a lot of work with many organizations around the world. Many times I was frustrated because it was just so hard to get organizations to be really truly innovative on a consistent basis, to get them to change ahead of the curve rather than only once the crisis had struck. That forced me to ask the question: what problem was management attempting to solve? All these organizations around the world are much more alike than they are dissimilar—they have more or less the same approach to strategic planning, to allocating resources, to budgeting, to promotion, to compensation.

In the late-19^th century, management was invented to solve the problem of efficiency at scale. And we did this. If you think today there are one billion people in the world who own an automobile, that’s almost inconceivable. So the traditional management model that was focused on efficiency and productivity has made an extraordinary contribution to human prosperity.

I began to realize that today organizations face new problems that are not simply about efficiency and discipline and alignment and scale. And yet that whole organizational model was built primarily to solve that single problem. Moreover, the way we historically solved the problem of efficiency of scale, was that we built organizations where we deskilled work, put people in silos, specialized their activities, created a very tight matrix of rules and procedures and we valued conformance above everything else: conformance to quality standards, work methods, product standards, schedules, budgets and customer requirements.

[pullquote] To create very efficient organizations, we had to drive the variety out of those organizations. We had to drive out the irregularities, and to do that we actually had to drive out the humanity[/pullquote]To create very efficient organizations, we had to drive the variety out of those organizations. We had to drive out the irregularities, and to do that we actually had to drive out the humanity.We wanted organizations that were as efficient as machines and that meant we needed human beings who would behave like machines. Then you wake up in a world and discover it’s the irregular people, with irregular ideas developing irregular strategies that create the irregular wealth, and our organizations were never built to encourage those kinds of behaviors.

That’s really what led me into the latest book, [it] was understanding that if you don’t change that management model at its core, anything you layer on to it—an idea wiki, skunk works for new ideas, or a corporate incubator—anything that’s built on that old management model is really not going to be very effective. So that’s the reason why we have to reassess management. We are now facing a set of problems—of accelerating change and hyper-competition and so on—that lie outside the performance envelope of that old management model.

Then the question becomes: what principles do you use to reinvent management? Very seldom as managers do we talk about our principles. Most leaders and managers around the world see themselves as very pragmatic and utilitarian and most of them will not even believe that management is built around a particular ideology and a set of principles. But of course, the ideology of management is controlism—it was built to drive control and conformance, and every organization needs some of that, but if you want to build an organization that is capable of more than that, you have to start with a different set of principles.

So what I’ve started to do over the last few years is say: ‘Alright, what things in our world are very adaptable?’ If we need organizations that can change as fast as change itself, then where do you look to see this in action? What are the systems that seem to be very resilient and very adaptable? One is markets. So the New York Stock Exchange, over the last 50 years, has outperformed every company on the New York Stock Exchange. Markets are very good at doing something where hierarchies typically underperform. Markets are very good at moving resources to new opportunities because capital is always seeking the next big golden opportunity. People may sell their shares in Google and buy Twitter, and then sell shares in Twitter and buy something else, and that decision making in a market is highly decentralized. No one executive can stymie new ideas, nobody will say: ‘Well, that’s not our core business or we’re not going to invest in that because it will cannibalize our old business.’

[pullquote] It is fundamentally dangerous for an organization’s adaptability when a single executive has the power to act as judge and jury and executioner on a new idea[/pullquote]So on average that decentralized decision making results in a better allocation of resources than top caliber decision making. Here is a simple analogy: imagine if there was only one venture capital company in the world, and it was led by, well let’s say Bill Gates. How much innovation would we have if there was only one place to go for funding? And yet inside most organizations, there’s only one place to go for funding and that’s up the chain of command. So you think today of the power of venture capital and now the power of crowdfunding, where there are many, many sources of experimental capital. It is fundamentally dangerous for an organization’s adaptability when a single executive has the power to act as judge and jury and executioner on a new idea.

The idea of markets and using market mechanisms to make decisions is only one of the principles that we need when we think about ‘Management 2.0’. If you look, for example, at the web, it is extraordinarily innovative and as a platform for innovation it is constantly evolving and adapting, spawning new business models and new forms of social organization. So you look at the web in addition to markets. The web has an emphasis on experimentation, you see this built around a meritocracy where people attract followers in social media only if people want to follow them—there’s no top-down assignment or distribution of authority. You see the power of community [on the web]: people coming together around shared interests. We have to look at markets, at biology, at the web and anything in the world that is highly resilient and adaptable, and we have to mine those things for the principles that will help us build organizations that are more adaptable than the machine-like organizations we inherited from the past.

Q. So this boils down to organizational DNA at some level?

A. Yes, I think so. You might want to call it culture or our management DNA, but it’s the deep principles on which our organizations are built. Managers always tend to look for or to imitate someone else’s best practices. Today we’re at the point in business history where we not only need better practices, [but] we [also] need better principles. In almost any field of human endeavor, you get to a point where you can’t solve new problems with the old principles. So for example, it was impossible to understand the sub-atomic world if you started with the principles of Newtonian physics. We had to invent a whole new set of principles around quantum mechanics. So I think there’s a danger in looking at one particular practice and saying, ‘Oh, let’s imitate that’, without going deeper and saying, ‘No, we have to start with a different set of principles and now think over the next few years how those principles come alive in our organization’. For example, the principle of openness and transparency, that’s a very important part of being an innovative and adaptable company.

The generation coming to work right now expects organizations that are open and transparent, and yet in terms of practices, that principle could be implemented in many different ways. Openness could mean that we share all of our compensation payments so that people feel they’re being compensated fairly wherever they are in the organization. Openness could be that we invite people to be part of the strategy conversation, that we open up our strategic planning to everyone in the organization. Openness could be that we set our salaries in a more peer review way. So you have to start with a principle and be clear what these principles are, and then over time say: ‘Alright, how do we translate that principle into action?’ I think it’s much more important for the long-term to start with the right set of principles than to imitate any single or particular practice.

Q. As you say this, the question that comes to my mind repeatedly is: what would the role of managers be in this new kind of management model?

A. In some sense, that remains to be seen. We’re obviously now in a transitional state, but one of the things that I think will happen is that more and more of the work that we traditionally thought of as managerial work is going to migrate outwards to the edges of the organization. [pullquote] More and more of the work that we traditionally thought of as managerial work is going to migrate outwards to the edges of the organization [/pullquote]So more and more of the work of managing is going to be done by people who aren’t perhaps managers. In most organizations we still have almost a kind of feudalistic system where there are executives—the leaders who set strategy, set direction, make the key appointments—then you have the managers who are responsible for translating strategies into specific goals and holding people accountable and coordinating operations, and then you have the actual operators, the doers. There was this implied distinction between the thinkers and the doers. That distinction has already started to blur or break down.

One of the great innovations of Toyota, many years ago, was the principle of kaizen and the idea that you could take so-called ordinary employees and turn them into sophisticated problem solvers, you could teach them the principles of statistical process control and pareto analysis, you could help them identify quality problems, solve them right there on the line, you gave them the power to stop a production line if they saw a problem. Now that goes back more than 30 years, but it was a very radical idea because it represented a profound shift of power from factory managers into kind of first-level employees. I think the same is now happening as we think about more and more managerial work. For example, [at] Red Hat, the software company, their strategy making process is open to the entire organization—a company-wide conversation.

I was at a plant of General Electric in Durham, North Carolina, and GE is a fairly bureaucratic company, but in this plant which does the final assembly for the largest jet engines in the world, they have 400 employees and one plant manager. So those employees are doing the production scheduling, they’re doing the quality control, they’re doing the training, a lot of the things that historically we thought of as managerial work are now being done by what are essentially front-line employees. That’s really what’s going to happen to management: more and more of that work will be distributed across the organization.

Now there are several preconditions for that happening. We have to give people the information they need to manage themselves, we have to make them more financial and business literate, we have to make sure that their actions and behaviors have consequences so they get immediate feedback on whether they are helping move the business forward or not. [pullquote] The idea that you need multiple levels of managers to manage I think is increasingly untrue, it’s perhaps the deepest orthodoxy, the deepest thought of all is that you need managers to manage[/pullquote]But the idea that you need multiple levels of managers to manage I think is increasingly untrue, it’s perhaps the deepest orthodoxy, the deepest thought of all is that you need managers to manage. But I now see larger organizations where the work of managing is highly distributed.

In any organization, there are still going to be some people who have more influence and more authority than others. There’s no assumption here that the organization is flat and that everybody has the same influence or the same pay. There will be a meritocracy, but the distinction is that in that traditional organizational form, we preemptively and systematically empower some while disempowering everyone else, and we vest power in positions. So power is kind of binary—I’m either a senior vice-president or I’m not.

What happens over time is you end up with many people in leadership positions that aren’t actually really leaders. They’re there because they had good political skills, they’re there because they had connections, they’re there because they added value last year or five years ago, but they are not there because they are true leaders now and they are individuals that other people want to follow.

Even in these organizations that have moved to what I would call a post-bureaucratic model—I wrote about one of them, Morning Star, at length in my book—when you go in those organizations and ask people who’s really making the most valuable contribution here, who are the individuals who are most critical to the organization’s success, people will all give you the same names. People will largely agree on who those individuals are, and they’re often compensated more, they have more responsibility, but they’ve achieved that by virtue of their value added rather than someone appointing them and saying you’re senior vice-president or you’re a department director.

The goal is we still need people who are leaders and we still need people who are capable of coordinating and directing, but the people in those roles are going to get there because of the value they add and the fact that other people are willing to follow them. That’s the same way power influence happens on the web. Now that could degenerate into cliques and sub-optimization. But if you have that ultimate economic accountability, then you could have a power structure that is much more fluid and is much more based on followership, the quality of your followership, than it is on whether you’re a successful bureaucrat and you understand how to accumulate and use power.

Q. You once said that as an organization becomes bigger, more and more of its energy goes into managing its own complexity. Is it then possible to have an organization with the best of both worlds: massive scale and also the flexibility and agility of a young start-up?

A. I think you’ve put your finger on exactly the challenge. Historically, most organizations have faced a number of what seemed to be intractable trade-offs. You could be large, or you could be adaptable. You could be highly efficient, or you could be innovative. You could be enormously disciplined, or you could be empowered. The fundamental challenge in reinventing management is to transcend those old trade-offs. It’s not entirely, but certainly to move way beyond the trade-offs that we have today.

The secret to doing that is to be able to distinguish between what and how, or ends and means. Because bureaucracy was a particular way of getting control, and it used narrow job descriptions, a lot of highly specified rules and close supervision to make sure people were doing the right thing. Now, can you get that level of discipline without having all of that bureaucracy and supervision? I think you can. For example, [for me] as a teacher in an academic institution, there’s not a lot of hierarchy; it’s very flat. But there is a lot of discipline because at the end of every term all my students rate my performance. All those ratings were visible to all my colleagues and other students. So there is no place for poor performance to hide. When I published an article, it was reviewed by my academic peers, not by some hierarchy, not by a boss.

That’s what I think you see in some of the organizations today that are both highly disciplined but also are not very bureaucratic. They’re using much more peer-based models. For example, they will ask employees to rank each other by their value added and use that to drive compensation.

[pullquote] You cannot have a resilient business organization if the operating units are very large, monolithic things. Big things are not adaptable, we know that—dinosaurs are gone, bacteria are still here[/pullquote]Now, back to your question: can we get scale and resilience and entrepreneurship at the same time? I think we’re still trying to invent that, but there are very promising examples. One of those examples is Haier. This is a company with 80,000 employees that recently divided itself into 2,000 business units because you cannot have a resilient business organization if the operating units are very large, monolithic things. Big things are not adaptable, we know that—dinosaurs are gone, bacteria are still here. So Haier divided itself into 2,000 business units, but then you have to ask: where does the coordination come from? Increasingly coordination will come from lateral communication and social networks where peers across the organization can discover for themselves where coordination needs to happen, where we need to be working together and then solve those problems. But it won’t come from a senior group that’s imposing those across the whole organization.

So at Haier they’re creating a lot of lynchpin roles where, for instance, for small operating units they really let individuals coordinate across all of these smaller business units. In the past it was impossible to achieve coordination without centralization, but now because we can move and share information laterally so easily, you can begin to see how we get coordination and the benefits of scale without having multiple layers of management, or as many layers of management.

One company that is very good at this is CEMEX, the Mexican cement company. They have national subsidiaries all over the world, local cement companies, but they also have a very robust social platform where there are more than 500 user-defined communities of peers coming together from around the world to work on shared problems. That could be inventing new kinds of cement, setting quality standards, reducing energy costs, but everyone in every plant around the world has the incentive to be more efficient, more successful now we can create these communities of passion online where people can share what they’re doing or you can immediately see who’s performing best, who’s lagging behind. A lot of the coordination will come from that horizontal communication rather than from top-down control.

Q. You also say that companies stand to overinvest in what is as opposed to what could be. So how can companies manage the present without losing an eye on the future?

A. As long as we still have more hierarchical organizations where the leaders have a disproportionate share of responsibility for setting strategy, leaders need to spend a lot of time investing in their own learning and asking themselves what things are changing around the world that are still small but are accelerating and one day affect our business. So that may be the emergence of the web of things, that may be the emergence of social activism around the world, it could be environmental issues, but I think it’s very, very important for a CEO or for other senior leaders to set aside perhaps 3-4 weeks a year where they are in parts of the world where they have a chance to be surprised by the future. Where they are not talking internally, they are not talking to their peers, they are not talking to the usual government ministers, but where the outward change is happening—technology, regulatory or demographic change. Because as a leader, when a young person comes to me and says, ‘Here’s something that’s new that we could do’, I have to know how to calibrate what I’m hearing.

I was working with a large company in Asia and we had trained hundreds of young people to innovate and they were working on new business models in social media. They came up with some amazing opportunities, but the dilemma was when it came to getting approval for those ideas, they had to pitch them to executives who were 55 and 60 years old, who had spent no time really understanding the world of social media. So they had no context for making a decision on whether to invest or not, and since they didn’t instinctively understand that space, they were skeptical about it.

So that’s the first responsibility of a leader: to make sure you are having a first-person experience with the future. Invest in learning, invest in reverse mentorship.

[pullquote] Often organizations fail because the leaders fail to write off their own depreciating intellectual capital—their emotional equity is invested in the past and people don’t feel confident in challenging them [/pullquote]The second thing you have to do as a leader is make it safe for people to dissent. An organization cannot challenge the status quo if individuals cannot challenge their leaders. So often organizations fail because the leaders fail to write off their own depreciating intellectual capital—their emotional equity is invested in the past and people don’t feel confident in challenging them. I’ve sat in many, many meetings where young people and middle-level managers in getting ready to present to senior executives, try to guess and anticipate what the senior executives want to hear. They’re not coming in and talking about what’s changing or talking about the truth or what’s uncomfortable, they’re talking about what will make the senior leader comfortable, what will fit that person’s preexisting prejudices. That’s very, very dangerous. As a leader, I have to encourage people to dissent. That means at every meeting asking certain questions, asking your subordinates, people around you: ‘Where did I get it wrong in the past?’ In other words, making yourself vulnerable and being able to acknowledge that sometimes you’ve made the wrong call. I would also want to ask people: ‘What would you do if this was your decision? If I wasn’t going to sign off at all, if you were going to make the decision, how would you make it? Or what would our fiercest critics say?’ So you legitimize people talking about people outside the firm who may be critiquing a strategy or critiquing a direction.

The last thing is that you have to make it easy for employees to get small amounts of experimental funding to try new things. If to get funding I need to go to my boss and my idea has to fit with their priorities or beliefs, that’s going to make it very difficult to start new things. I don’t think you want people to take big risks initially, but you have to make it possible for them to take small risks. So what I’ve been advocating, and a few organizations are doing this now, is to create something more like an internal Kickstarter. Or perhaps in an organization of size, there are tens of people, maybe hundreds of people, maybe more, all of whom take a small amount of their budget every year and support any project that seems to be interesting. So if I have an idea, there are multiple places to go for funding, rather than just one.

So I think those three things [are very important]: investing in getting closer to the future as a leader, making it safe for people to challenge you and making it easy for experiments to get started.

One of the most innovative companies right now on the planet is Amazon. And Jeff Bezos has said in his letter to shareholders in 2013, [their] goal is to be the biggest laboratory in the world. To do that you have to be able to experiment cheaply and fail quickly, but it also means that every idea cannot come first of all to get the approval of the CEO, because that would be a choke point, that would be a block on innovation.

Q. Not every company is born with a business model like Morning Star or W.L. Gore, companies that seem to have got it right from the very beginning. Now we do have companies with more traditional business models and long histories and legacies like a GE or a Unilever. If they were to decide to future proof their business model, what would be the starting point?

A. Many of the companies we see as today’s management pioneers did start with a clean sheet of paper, a different set of principles. So the founders of W.L. Gore 55 years ago started by asking themselves how do you create an organization where people spend all of their time innovating and almost no time fighting bureaucracy. And you’re right though, most organizations have a set of legacy management practices, they have that traditional hierarchy, they have many levels, they have many rules, they are inherently conservative, people feel disempowered, strategy is controlled by a small number of senior executives, and that will not change overnight. The secret here, whether it’s evolving your business model or evolving your management model, is the same: experimentation.

I gave the example of Amazon constantly experimenting in a way that helped them evolve their business model over time and create new businesses. But the same thing is true when we try to evolve our management model. If we want to create organizations that are truly post-bureaucratic, where meritocracy rules, where every idea competes on an equal footing, where innovation is an instinctive capability, where communities rapidly form around new ideas, moving to that goal is going to take probably at least a decade for traditional companies.

Management 1.0 didn’t get invented overnight. Management 2.0 will not get invented overnight. But the important thing, if I’m GE or I’m Unilever or any large organization, is to encourage management experimentation, to go back to these new principles of transparency and meritocracy and openness and disaggregation and to ask: ‘How do I experiment with that in a small low-cost way where I can test that idea without taking a big risk?’

A couple of years ago I was talking to one of the largest food and beverage companies in the world. They wanted to start to become more open and transparent as a company, and they understood that young people particularly demanded this. They were conducting their annual meeting of senior marketing executives from all over the world—400 top marketing executives from every corner of the world—and traditionally in a company like this, those meetings are very carefully scripted in advance: everyone’s presentation is pre-approved, all the messaging has been decided upon, they’re very clear on what they want people to take away as key tasks at the end of this meeting. So there’s very little opportunity for spontaneity or dissent or questioning.

They started to recognize that’s a problem and wanted to create a more open dialogue. How do you do that without it degenerating into chaos? How do you do it without blowing up that model, your annual meeting that has served you well for years? So they ran a small experiment—they invited 20 young people to come and sit in on this big meeting, and they asked these young people to live tweet with a particular hashtag their reactions to what they were hearing from their senior leaders. And they made it clear that they wanted to hear dissenting voices—it was okay to disagree. At the same time they were streaming this meeting around the world, they also streamed all hundreds of these tweets from the young people.

Now that’s not expensive or difficult. It takes a little bit of courage, but it starts to send its message: we want to hear your voice, we want to give young people more influence over our thinking and our policies. So that’s what I mean by a management experiment—something that can be done cheaply and done easily, but starts to take that principle and make it more real in an organization.

My hope is that a large organization of the sort you are mentioning would be doing hundreds of experiments a year. Because I think today you have to be able to imagine a radical alternative to the management status quo. You really have to be able to think about the post-bureaucratic world. At the same time you have that revolutionary goal you have to take evolutionary steps because the management systems and processes we have, most of them are there for a reason. And you can’t simply blow them up. You have to experiment with the new in parallel to the old and you have to do it in low-cost ways. So you go in with some hypotheses to test, do this with volunteers, be very clear on what business outcomes you’re hoping to get and then you see whether this works or not.

The challenge in organizations of all sizes is to make this kind of management experimentation legitimate, to encourage it, and then propagate the things that work and roll those out. The things that failed? Well, we learned something and we wo