This past Fall, I taught my MIT graduate seminar Technology-based Business Transformation for the second time. The focus of the course is on how to leverage emerging, disruptive technologies to significantly transform a business or even a whole industry. I use examples from a variety of companies and industries, but in particular, throughout the course I use the concrete lessons we learned from IBM’s e-business initiative in the second half of the 1990s, as well as my personal experiences as general manager of the Internet Division during this period.
I spend the first class talking about innovation as a key business imperative. Every business must continuously innovate in order to survive the competitive pressures all around them. In that first session we discuss in some depth IBM’s own near-death experience in the early 1990s. Few companies survive this kind of experience. IBM managed to survive and reinvent itself in the process by embracing a number of major technology, market and organizational innovations - the Internet in particular, - that transformed the company and its culture.
In my opinion, IBM's near-death experience and successful reinvention are inexorably linked. In business, as in life in general, cataclysmic event are great learning experiences, assuming of course you manage to get over them and keep going. Such events open the mind to new experiences as nothing else does, totally changing our previous inflexible views of life. This is a key concept in ancient Greek tragedy. The tragic hero need not die, but it is important that he acknowledges his responsibility in his doomed fate, learns from his mistakes and corrects them moving forward.
Lessons from engineering
Learning from mistakes is the essence of Six Sigma, Lean Production and similar methodologies that aim to identify and remove the causes of defects and errors in manufacturing and business processes. Root cause analysis is one of the key tools they use. It is not enough to merely address the immediate obvious symptoms in solving a problem. You must attempt to find, and correct the root causes of the problem in order to minimize the likelihood that the problem will recur.
If customers are having problems with your products, say a computer or a car, you obviously first need to quickly find and fix the problem and make sure that customers get the fix as soon as possible. But, you then need to understand what went wrong in the first place that allowed the problem to happen and go undetected, identify the responsible processes and change them as appropriate. Companies whose management systems seriously embrace such continuous improvement methods will over time achieve significantly better quality in all their products and processes.
This is even more important when addressing a major malfunction that caused people to die. For example, two shuttles have been lost in flight resulting in the deaths of all crew members aboard - Challenger in January of 1986, and Columbia in February of 2003. Following each loss, a national commission was created to investigate the causes of the disaster. The commissions determined the technical causes of the accident, along with recommended changes to make future shuttle flights safer.
The commissions also examined the management factors that may have contributed to the accident. The Rogers Commission, which investigated the Challenger disaster found serious organizational breakdowns in the management of NASA. Engineers in the program had expressed their strong concerns that the launch had not been rated to fly in the cold temperatures of the day of the launch, but their concerns were overridden by management after a series of launch delays.
Learning from experience is a key part of all engineering disciplines. But, as was the case with Challenger, the root causes are often as much a result of poor management and organizational breakdowns as they are the results of technical flaws or mistakes. Yet, most companies don't spend enough time analyzing and improving the effectiveness of their organizations, and neither do institutions in general, such as in health care, education and government.
Business and management schools do not typically spend much time analyzing the causes of organizational failures beyond the isolated case study. As companies, industries and the overall economy have become much more integrated, interdependent and complex, we badly need to understand the root causes of systemic organizational failures. We have neither the tools, the skills nor the culture to do so. This situation has to change going forward as such systemic failures will likely happen with increased frequency. Our universities need to step up to the challenge.
Understanding the root causes of problems and of the organizational failures that failed to prevent them is necessary, but not sufficient. It is not enough to have a strategy. You have to act on it - easier said than done. The problems have to be corrected, which sometimes requires major organizational changes if the problems are serious enough. But, as is often the case, companies and institutions in general will resist major changes unless they have no choice.
In the case of IBM's near-death experience, we had a pretty good idea of the technology and market transitions heading our way before they actually happenned and almost did the company in. We not only presented the results of our analysis to senior management, but thankfully, started working to design and prototype the needed alternative solutions in our R&D labs. Everybody at the top of the company accepted our technical recommendations and strongly supported the work on the alternative solutions. But they resisted implementing the massive management and organizational changes that went along with the new solutions until it was almost too late. Only after IBM went into the crisis that nearly killed it and a new CEO was installed, did the company undertake the necessary changes.
I strongly believe that the key reason IBM survived a massive transition that would have done in most other companies was because its world-class technical community had anticipated the coming changes and was busy preparing for them. But even then, the company's senior management was very slow to act because they knew how painful the transition would be. Despite all the talk to the contrary, people will avoid embracing disruptive change unless it is absolutely necessary.
Are we ready to change?
You find a similar reluctance to embrace change in the industries that are presently in the greatest trouble - such as finance, automobile, and health care, - and that are most in need of major innovations and transformation. Most people will agree that things have not been quite right with the management of the companies in these industries, as well as with the government bodies that have been charged with overseeing their smooth functioning. For example, in the last decade alone, study after study have made the case for the urgent need to reform health care. The studies were all well received, but then little happened.
Are the current events in the financial and auto industry cataclysmic enough to cause the needed changes? Is the country scared enough about the continuing rise in health care costs to finally do something about it? Are we finally at the point where we are ready to learn from our experiences and start taking the needed actions?
I am not sure. I don’t know if the companies and industries involved, along with the appropriate government regulatory bodies, are yet ready to look deeply into the behaviors that got them into trouble and learn from their experiences. The reason is, I believe, because the management of most the companies involved are still defensive about their problems so their natural tendency is to avoid facing their mistakes. Any engineer will tell you that if you hide your mistakes you are missing invaluable learning experiences. Unless we figure out a way out of this quandary, we will not be able to make the needed progress.
Role of universities
Also, we have not seen, at least not yet, the deep studies of what has gone wrong, along with concrete recommendations to fix things, that you typically see accompanying engineering problems, from a bad micro to an airplane crash. Universities in particular are critical to this role because they should have no qualms about analyzing what went wrong with the organizational systems in question.
But to do so, universities need to get over their own problems - their own siloed organizations. Management and organizational systems are systems composed of people. That little sentence cuts across a number of departments that must work together to address the problems: the study of systems, especially of highly complex systems, is the province of schools of engineering; management and business schools study companies and organizations; and the social sciences and humanities are the parts of universities most involved in studying the behavior of people and their interactions with each other. Any serious study of complex organizational systems has to include all these various disciplines and skills in order to make serious progress.
In addition, the organizational breakdowns are happening in the real world, and that is where those studying the problem must go to find the needed information and expertise. By themselves, abstract academic models will just not do, any more than they would explain what caused the crash of an airplane. These are incredibly complex, messy, chaotic problems we are trying to understand, and the fact that people are the key components in organizational systems make these problems particularly unpredictable. We need experts from industry and government involved in these studies, and we need graduate students out in the real world collecting data and talking to people so we can build the proper models that will help us get a realistic picture of what is going on.
Need for government support
Finally, somebody has to fund this work. This is a serious problem. The Federal government, has traditionally had the overall responsibility for funding research and education in new, complex areas. But government itself is very siloed when it comes to funding the study of problems that cut across multiple disciplines.
For example, even though there is general agreement that health care delivery is one of the grandest challenges facing the US, the funding available for research in health care delivery systems, processes and organizations is pitiful. Were the US Federal government to charter a special commission to understand the underlying causes of our financial crisis, I am not sure what Federal agency would have the lead in doing so.
The Federal government is relatively well organized to support the needs of the industrial economy, with organizations like NSF, DoE, DoD, NIH, and NASA supporting great research in science, engineering and medicine. We now need to similarly organize to support the new multi-disciplinary grand challenges of our emerging knowledge economy.
Lots to do, as we prepare for the turbulent years ahead.