About the book

Executive Summary | Preface – why I wrote this book | International editions

Executive Summary

Introduction to the book by Lars Kolind (Windows Media, 8 min video, broadband)

In most people’s minds, innovation is synonymous with new products and technologies that break barriers hitherto unimaginable: the newest Intel chipset, the iPod and new genetically modified crops. Technological innovations may save us time and offer new choices, but their impact is minimal compared to another type of innovations rarely talked about: Social innovations. Think back about 200 years where two remarkable social inventions were made: The multi-party democracy and labor unions. Add the organization of public schools and later the invention of the limited company as a framework for the industrial corporations that are still today the backbone of the world economy. These examples of social innovations have had a massive impact on our lives. Add recent social innovations such as Internet communities and the Internet itself (which is primarily a social and not a technological innovation). It is paradoxical that social innovations attract so little media attention despite the fact that they most often have a much deeper and long-lasting impact on our lives than a new gadget such as the iPod.

This book is a quest for a much needed social innovation: a new framework for knowledge-based business that will enable organizations to break the conventional corporate lifecycle of growth, stagnation and decline.

We have gradually come to think that the conventional hierarchical line-staff model is almost the only way we can organize a large corporation or public institution. This model was indeed a remarkable social innovation about one hundred years ago, but it was built on a foundation that has changed dramatically since then. It assumed relative stability, i.e. a slow pace of change. It aimed at mass production of products and services at the lowest possible cost, but not innovation. It was based on a workforce that was often poorly educated; thus requiring specialization in work processes. This was the situation one hundred years ago and for decades thereafter, but not today. Today change happens every day, products must be clever and customized, and the workforce is much better educated. These differences explain why this social construction – the conventional hierarchical line-staff organization – is rapidly becoming obsolete.

I have taken on the challenge to search for a new social construction – a new type of organization – that builds on today’s and tomorrow’s realities. I aim to find an organization that combines the needs of all relevant stakeholders such as shareholders (profitability), employees (meaningful work and a fair return), customers (innovative products and services at an attractive cost), suppliers (win-win partnership) and society (social, environmental and ethical concerns).

In most industrialized countries, governments, corporations and individuals have responded by focusing on entrepreneurship. Everybody seems to love it, but it seldom delivers. Less than one out of ten startups makes it beyond the small business stage despite long working hours and great enthusiasm. For each successful startup, however, there are hundreds or more mature organizations that could grow much faster and make much more money. They have access to funds, infrastructure, expertise, back-office functions, and (often crucial) market penetration and visibility. But they fail to break out of their first cycle because they are stuck with hierarchies, silos, corner offices and irrelevant business models. Their social construction is obsolete.

The Second Cycle is the result of this search. The search starts with an analysis of why conventional organizations increasingly become irrelevant today. The symptoms are that they tend to decay once they achieve a certain size, age and level of success. The mechanisms behind are far from rocket science and no new research is needed to confirm that something is fundamentally wrong. Just look at the track record of large organizations – including countries – over time.

The first cycle is the ordinary corporate lifecycle that encompasses conception, early turbulence, growth, stagnation, decline and extinction of organizations. The second cycle is turned up-side down. It starts after the peak of the first cycle. It may drop slightly while the organization jumps from the first to the second cycle and it assumes new growth once the organization has moved to its second cycle platform. The Second Cycle shows how organizations may stay fresh and continue to innovate and grow on a sustainable basis. If they don’t, a new phase of stagnation and decline is waiting.

There is a mechanism behind the well-known first cycle phenomenon that turns success into stagnation and decline. This involves three fundamental driving forces:

  • 1) growth in size of the organization,
  • 2) increasing age and maturity of the organization, and
  • 3) the built-in effects of success on perception and culture of the organization.

This mechanism transforms the once agile organization into one that is dominated by a complacent culture, which later turns into arrogance, luxury and laziness.

Although this transformation is often obvious to outside observers of the organization, this book highlights two mechanisms that tend to make the organization itself unaware of the transformation it is undergoing:

  • 1) Corporate deafness, and
  • 2) Misleading financials

Successful organizations become deaf because they increasingly attribute success to their specific approach to business, both towards customers and internally. They overlook the massive good-will that has been built up during decades of previous success and which may be the main explanation of their current business success. They believe that it is the current management and the current products and marketing concepts that constitute the main source of their success, which is often not the case. Long after current practices have become obsolete, organizations celebrate and market them as their unique “way” of doing business. Dissidents among staff are expelled and information that may question the organization’s unique “way” is suppressed. Need an example? Just remember the Soviet Union before 1989.

Unfortunately the corporate deafness may often be helped by misleading financials. Successful companies that stagnate in their core business often enjoy a massive positive cash flow. Core business becomes cash cow business and cash is invested in mergers and acquisitions that boost top line growth and maybe even profits by synergies and downsizing operations. Consolidated financials may thus look healthy despite core business stagnation and decline.

One day, when the cash cow dries up and when there is no more downsizing to be made, the corporation moves into deep trouble. At that time it is often too late. From an investor’s as well as society’s points of view, there is a great need to assess how far an organization has moved on the first cycle curve – or how far away it is from a new platform for sustainable second cycle growth. The Second Cycle offers a simple web-based tool for managers to perform such an assessment of their organization and enables employees to participate in the assessment as well. The outcome is a “Second Cycle Index” between 0 and 100 where high scores indicate that the organization is close to a platform for second cycle growth. Low scores indicate that there is a greater need for change in the organization before it is ready for sustained second cycle growth.

Once the organization has accepted the challenge to move towards a platform for sustained second cycle growth, The Second Cycle offers four key components of the platform and a series of tools to get there:

  • 1) Meaning, i.e. a purpose beyond making a profit,
  • 2) Partnership, internally and externally,
  • 3) A collaborative organization (Spaghetti Organization), and
  • 4) Value-based leadership

This platform for second cycle innovation and growth is an attempt to present a new social construction. It is radically different from most companies or institutions today and the transition does not happen automatically. However, I have put together seven easy-to-use tools to facilitate such a change, including the assessment tool (TSC Index) mentioned above.

Two tools help understand the current situation of the organization:

  • 1) TSC Index: Indicates to what extent the organization contains the four components above, and
  • 2) Mental Model Mapper: Analyzes the organization’s current mental model, its origin and relevance.

Two other tools help build the foundation for a future second cycle:

  • 3) Value Identification Process: Identifies values and their consequences, and
  • 4) Consensus Creation Crash Program: Aligns values with the real world.

Three tools assist in the change process:

  • 5) Knowledge-based People Management: Optimizes key people management processes,
  • 6) Innovation Powerhouse: Optimizes workplace design for innovation, and
  • 7) Change Process Tools: Facilitate the change process.

Each tool is described in detail and is ready for use.

To illustrate their use, I have applied the Mental Model Mapper to three radically different organizations:

  • Primary schools
  • Labor unions
  • The US automobile industry

The results are explained in Chapter 8 along with a sketch of new mental models to replace the existing.

The conclusion of the book puts the potential for change of mature organizations into perspective: If the new social construction – the Second Cycle platform – is widely accepted, mature organizations (public and private) can be moved out of the conventional lifecycle into sustained second cycle growth. This will benefit shareholders through greater value creation, customers through more innovative and customized products, employees through better jobs and a fair share of the value they create, suppliers through win-win partnerships with their customers, and society through organizations that serve a meaning beyond profitability. This could fundamentally change not only the business community, but the world.

Why do we allow conventional thinking to prevent us from just doing it?

Preface – why I wrote this book

During the time I worked on this book in 2005, the news was full of stories about Ford and General Motors selling off assets, labour unions losing members, ever new problems hitting the Catholic Church, public schools being criticized for lack of relevance, German industry unable to meet competition from low-wage countries, the Bush administration stuck in scandals, and numerous other well-established institutions in deep trouble. It seems that everybody accepts that the upward part of the corporate lifecycle must be followed by a downward part that ends with extinction. The Roman Empire, The Soviet Union, The British car industry, Digital Equipment Corporation, Enron, and Arthur Andersen are but a few examples of the corporate lifecycle curve that most people believe is as fundamental to business as Newton’s Law of Gravity is to classical physics.

There is little doubt that there are mechanisms associated with success that tend to transform once agile and creative organizations into complacent bureaucracies. However, the big question is why top managers overlook these mechanisms in their own organizations, even at times when their organizations’ lack of performance is obvious to outsiders. What is it that blinds management and prevents management from taking appropriate action? Why is this disease allowed to develop so far that is may be impossible to cure once it is discovered? And what can be done to revert or avoid decline and perhaps even establish a platform for renewed growth, a second cycle?

To find answers to these questions, I used my personal experience as a starting point. I reflected upon the organizations I have worked for, either as an employee, a manager, a board member, or a volunteer. I searched for small things under the surface that indicated or influenced the mechanisms behind the corporate lifecycles. I was particularly struck by several examples where organizations possessed knowledge, ideas, technologies, or people that could have brought them into the world league of their industry, opportunities that were not pursued. I realized that opportunities were typically lost when organizations appeared to be the most successful - not when they were struggling.

This book neither fits into the mold of conventional management textbooks nor is it an autobiography. My experience with management literature is that authors often attempt to make something look like a theory that has very little theoretical substance. Simple points that could be conveyed in a minimal amount of text are often explained and illustrated with so much excess text that the message gets lost. On the other hand, autobiographies often seem to serve only one purpose: to celebrate the merits of the author.

I call this an experience-based hands-on management book. It is written for easy reading - not loaded with unnecessary theory and references. It is designed to be useful for managers, politicians, volunteers, students, and others who are involved in or concerned about the future of their organizations. It recognizes current theories of management, but builds primarily on practical experience - that is, what has worked for me. I have not studied the behavior of hundreds of organizations in order to back up my recommendations with solid statistical evidence. However, this has given me more freedom to express my points bluntly and clearly. You will have to determine yourself whether these recommendations apply to your organization.

The book has four parts. First is an analysis of the mechanisms of the conventional corporate life cycle, in particular why organizations become stagnate and start declining at times when they think they are highly successful.

Second, you will find a proposed design for a new platform for innovation and growth - the second cycle. This platform stands on four pillars and each pillar has its own chapter: meaning, partnership, collaboration, and leadership.

Third, I invite you to look into my toolbox. It contains seven tools that I have used to diagnose an organization, establish a new foundation for it, and move it into a second cycle of sustained innovation and growth.

Fourth, I have illustrated the main points of the book with three living examples of organizations that in my view are experiencing severe decline because they have not realized the need to move into a second cycle. I finish by putting the examples into greater perspective: how we could enjoy much more growth and prosperity if mature organizations were able and willing to jump out of their conventional lifecycles and start a new second cycle.

For inspiration, I have enclosed an appendix with the most significant case study I know about organizational transformation: the rebirth of troubled hearing aid manufacturer Oticon into the industry leader in the 1990s. That story taught me about both organizational decline and what it can take to jump into a second cycle. May it inspire you as well.

Throughout the book, I will invite you to take a moment and reflect on your own situation or other organizations you know, in light of what you read. Watch for the magnifying glass symbol!

Lars Kolind

International editions

The original version of this book was written for Wharton School Publishing for publication in English in May 2006. A version in Kolind’s mother tongue, Danish, (Kolind-Kuren – fra Bureaukrati til Vækst) was published simultaneously and there are more than ten versions planned in other languages already planned to appear later in 2006 and 2007. My weblog will provide information on publication times and publishers in other languages as they appear.

© 2006 Lars Kolind. All rights reserved.