Managing Strategic Relationships: The Key to Business Success

by Leonard Greenhalgh

Overview

Contrary to the gospel of a century of management thinkers, the primary job of the manager is no longer to plan, organize, direct, or control, asserts management expert Leonard Greenhalgh. Instead, he argues, today's successful managers are primarily negotiators who are judged on their ability to foster, coach, protect, and support collaborative relationships -- and manage conflict -- with peers, workers, bosses, suppliers, customers, regulators, competitors, and stakeholders.
In one of the most comprehensive analyses of business relationships ever written, Greenhalgh shows how relationships -- not technology or "know-how" -- are the foundation of the new extended enterprise. In immensely readable prose, he describes how companies have moved beyond adversarial relationships of command-and-control hierarchies to a new communal world in which internal networks of autonomous professionals and external networks of collaborating organizations compete against rival networks. In order to manage, managers must acquire a whole new set of negotiating skills, he argues. Traditional negotiating techniques promoted winning and self-interest, leaving a wake of bitterness and acrimony. Here Greenhalgh introduces for the first time a brilliant concept he calls "Commonwealth," which promotes ongoing relationships and the common interest. Using scores of detailed case studies and examples, he offers a set of cutting-edge tools managers can apply immediately to repair and improve relationships between people at all levels of responsibility, between groups, between organizations themselves, and between personalities involving gender differences.
Timely, stimulating, and powerful, Managing Strategic Relationships is essential reading for every manager who hopes to succeed in the organization of today.

Product Details

ISBN-13:	9780743213721
Publisher:	Free Press
Publication date:	08/01/2001
Sold by:	SIMON & SCHUSTER
Format:	eBook
Pages:	336
File size:	1 MB

About the Author

Leonard Greenhalgh is Professor of Management at the Amos Tuck School of Business Administration at Dartmouth College, where he has taught "Managing Strategic Business Relationships" to countless executives. An experienced manager himself, Professor Greenhalgh serves as counselor to many large corporations.

Read an Excerpt

Chapter 1: Managing in the New Era

Gaining competitive advantage has become more difficult than ever before; and sustaining it, almost impossible. This is the result of several emerging trends. Agile competitors have sped up their time-to-market, and can quickly nullify a first-mover advantage. New technology is usually available to anyone smart enough to adopt it. Consulting companies identify industry best practices and soon "clone" them within competing organizations. And quality levels have become so uniformly high that people can't tell the difference between good and best. Meanwhile, markets have become crowded with competitors from all over the globe, major industries have more capacity than demand, and few market niches remain unexploited.

Managers describe it as a new era for business. And it is. Old pathways to success lead only to mediocrity in an arena that won't tolerate it.

Being good at some things is no longer good enough. In fact, being good at everything doesn't assure success if the organizational elements being managed aren't properly aligned. Thus, the organizations that will make out best in the new era are those that really have their act together -- those that can successfully integrate strategy, processes, business arrangements, resources, systems, and empowered workforces. We'll learn that this can't be accomplished unless managers do a good job of creating, shaping, and sustaining business relationships.

But before we get too far ahead of ourselves, let's briefly contrast two companies to see the competitive disadvantages that arise when relationships aren't managed well.

Two Different Organizations

Joe and Josephine are twins, now in their late twenties. They live in the same city, but work in different organizations. The different organizations are pursuing sound strategies, have been reengineered to have good business processes, are dealing with the best available suppliers, are not lacking resources, have fully developed systems in place (such as state-of-the-art management information systems), and have a workforce trained well enough that they can do their jobs without being micromanaged. Nevertheless, the two organizations produce very different experiences, and very different outcomes. Let's look at a day in the life of each of the twins.

Joe arrives at the office a few minutes late, as usual. He nods a courteous but unfeeling greeting to his co-workers and boss as he walks through the office, then sits down at his desk and begins the day's work. He checks his voice mail and e-mail, organizes his paperwork, and then begins his first task.

He calls a supplier to try to expedite a late delivery of components. He listens to the reasons why the delivery is late, applying pressure by implying that the supplier might lose future business. When this fails to improve the delivery date, he calls alternative suppliers to see if they can do any better. (They can't.) Then he calls his own customer who is expecting delivery of the finished product, and explains the problem with the supplier not delivering components on time. He assures the customer that he has called alternative suppliers and can't get a better delivery date, and concludes the conversation by saying, "I'm sorry if this causes you inconvenience. But this is beyond our control."

The supplier senses that despite Joe's polite expression of regret, Joe doesn't really care whether the late delivery causes inconvenience, or whether the customer does business with someone else in the future. This impression is, in fact, accurate. Joe and his co-workers agree that "this is just a job. There'll be other customers if we lose this one. There'll be other hassles. The boss will always be breathing down our necks, looking for opportunities to write us up. But everyone has bills to pay, so we have to put in our time on the job." Their cooperation with each other is limited to keeping the boss in the dark. There's an unstated agreement that they will "cover" for each other.

Joe's twin, Josephine, has a very different day at the office. She arrives there early, and interrupts reading her e-mail to greet arriving co-workers with genuine affection. Their caring is communicated by their touching. When the boss arrives, she pauses at Josephine's desk to exchange stories about unruly kittens. Then they review the day's priorities.

At 10 A.M., Josephine patches together a conference call so that her customer can speak directly with the components supplier who's causing a production delay, and the three of them engage in earnest problem solving. The customer learns that he'll have to adapt to the delay, but his commitment to continue buying from Josephine is strengthened as a result of the interaction.

Josephine's organization is functioning more effectively than Joe's. It's more efficient and more innovative. It creates greater value for customers and is increasing its market share as a consequence. It has low employee turnover, and attracts good people as it grows. It's very adaptable, with employees responding quickly to the need to change, which happens a lot in their volatile industry.

Josephine and her co-workers work hard, yet they look forward to going to work each day. Their tasks aren't always fun, but their camaraderie gets them through difficult times. This is a stark contrast to Joe's work situation, which is drab and gray, and operates far below its potential.

Joe's boss is as frustrated with the state of affairs as Joe is. But he doesn't really understand what's wrong. He followed the consultants' advice about installing a tougher control system and providing more training. He tightened up the performance appraisal system and began providing incentives for good results and penalties for poor outcomes. He even singled out the best performers for recognition as Employee of the Month. But nothing has made a real difference, and he has become discouraged. At this point, he, too, dislikes coming into work each day.

Many of us -- in fact, most of us -- have worked in underperforming organizations like Joe's. And all of us have had the misery of dealing with someone who has developed an attitude like Joe's: a store cashier, an airline ticket agent, a motor vehicle registration clerk, or a hotel telephone operator. It's easy to attribute the bad attitude to personality, but you know from your own experience that some situations bring out the worst in you, and others bring out the best.

Two Different Sets of Relationships

Joe's company is organized conventionally -- that is, according to the economic principles espoused by Adam Smith and the economists who extended and elaborated his writings. These principles include individualism, self-interest, power, control, and competition. All of these involve adversarial relationships. To the old-school economist, adversarial relationships are seen as a positive factor, because they are the means of survival and prosperity in a dog-eat-dog world. But they are also the relational dynamics that create a dog-eat-dog world. The success of Josephine's organization shows that it doesn't have to be that way. After all, dogs are by nature pack animals with genetic predispositions to live their lives cooperatively rather than individualistically. We'll learn that this is also true of Homo sapiens as a species.

In relational terms, Josephine's organization is a community. The people who work together form the same bonds they might form outside of work. From 8 to 5, they function as if they were close neighbors engaged in a common project. Their primary focus is on their shared task, but comradeship and social support are integral to getting the work done. Of course, they like some co-workers more than others, and they experience intermittent strains in relationships that need to be healed. This system is, after all, a human one, displaying all the friction, misunderstandings, and emotional reactions that arise when humans interact.

Josephine's boss is not an outsider to the group: she's a member with a specialized role. Neither are suppliers and customers seen as outsiders: they're part of the community, too -- they're viewed as value-chain partners. Interestingly, even competitors aren't viewed as archenemies. Josephine realizes that they can be allies when her organization needs to take on a project that's too big or too risky for her organization to take on alone. Maintaining a positive relationship with her counterpart in the competitor organization also comes in handy when she needs to outsource work, such as when production problems in her own organization are causing delays. But even when competitors can't help her at all, she doesn't want them to have animosity toward her organization. Ill will could motivate them to undermine her organization in their advertising, or embroil the two businesses in a crippling price war.

Two primary relationship principles determine how strong a sense of community Josephine and her co-workers will experience: inclusion and commonwealth. Inclusion gives Josephine a sense of belonging -- the belief that she's an insider rather than an outsider. Commonwealth involves the sense of having a common fate -- the notion that success is everyone's success, and failure is everyone's problem.

Inclusion and commonwealth are the building blocks of collaborative business relationships, and are vital for business success in the new era. We need to understand them in detail, because they're a source of competitive advantage that's largely overlooked.

We also need to understand why Joe's organization is such a failure. Even though the organization is still economically viable, nobody wants to work there, customers and suppliers don't like doing business with it, and it's neither efficient nor adaptive. Its failure is attributable to opposite relationship dimensions -- exclusion, and a culture of self-interest.

While Josephine's organization is a communal form, Joe's is a conventional hierarchy -- a vertically layered structure with power and privilege at the top, and subordination and deference at the bottom. Its designers had envisioned an entity that functioned more like a machine than a social system. When the human element was taken into account at all, the design was guided by misapplied economic assumptions about human nature: that self-interest is the ultimate determinant of behavior, and is maximized when employees earn as much as possible from contributing as little as possible. Managing such people involves setting up constraints, controls, rewards, and punishments to overcome these supposedly "natural" inclinations.

There's a cost to being wrong about human nature. The down side of managing this way is evident in Joe's response to the work culture in which he spends his days, and his response is both understandable and predictable. If he's viewed and treated as a cog in the machine -- the current occupant of a role programmed to carry out a job description -- psychological withdrawal is an adaptive reaction to the circumstances. Being sullen and reserved is appropriate and healthy behavior within the relationships he experiences. How else could he react?

Furthermore, if customers and suppliers are viewed as simply pursuing their own self-interests, then it makes sense to limit the relationship to arms-length contractual arrangements, and deal with each other as adversaries. If the economic bargain is attractive enough, they'll take the deal. If it isn't, then Joe has to put more on the table, or find others who are hungrier for the business. He doesn't need to think about relationship factors other than roles in an economic transaction: any other considerations are irrelevant.

From this perspective, Joe is a model employee: he sticks to business and doesn't get involved in distractions. In contrast, Josephine wastes a lot of time engaged in "touchy-feely stuff." She needs retraining and close supervision. Yet she's bringing in twice as much business as Joe, and at a higher profit margin; she retains customers while increasing market penetration; and, she gets suppliers to contribute ideas and information that increase her company's competitive advantage.

Something is obviously wrong with conventional models that visualize mechanistic structures and promote adversarial relationships. If managers don't fully understand why Josephine is more successful than Joe, they won't be very competent in the coaching role. And if they don't fully understand why Josephine's organization is more successful than Joe's, they won't be competent in designing organizations that create and sustain competitive advantage. Note that if you were to transfer Josephine into Joe's organization, before long, she'd start acting just like Joe -- if she didn't quit first.

A New Approach for the New Era

The themes of this book outline an approach to designing and managing businesses that differs sharply from the one that prevailed throughout most of the twentieth century. The old approach is not well suited to the changing business environment. Look closely, for example, at the new generation of "subordinates." They consider themselves autonomous -- as independent professionals who can be given a general goal and left to accomplish it without any micromanagement. They look to the manager to facilitate their achievement rather than to direct and control their work. They want to be supported rather than supervised as they strive to provide increasing value to the client or customer.

The Old-Paradigm Hierarchical Organization

Despite the changes and our growing awareness of them, Joe's plight is not unusual today. Many managers' understanding of organizations is seriously outdated. It's easy to see why. The management books written during most of the twentieth century were based on Western experience with traditional businesses competing with other traditional businesses. Their struggle for dominance took place in a domestic marketplace sheltered from global competition. A business didn't have to be well managed to survive and prosper in this environment: it only needed to be managed better than its domestic competitors.

This situation led to a lot of false learning by managers and by the scholars who studied them. Managers figured that if their business was doing well, then they must be doing things right. A more accurate conclusion would have been that if their business was doing well, then they must not yet have faced world-class competition.

Scholars fell into the same trap. They studied organizations that were apparently "successful" and wrote about what seemed to account for the success. What they didn't do was look at what it would take for organizations that had been successful in the past to hold their ground against the new generation of competitors.

Another impediment to the development of our knowledge has come from the overemphasis on (and misapplication of) economic theory. Economics is extremely useful in certain domains -- especially in understanding how markets should operate -- but not very helpful when applied to a particular organization or its employees. An organization is a dynamic system of complex human relationships, most of which fall outside the scope of economic understanding. As a result, there remains a lot of misunderstanding of how to achieve organizational effectiveness as well as plenty of bad advice about how to manage people.

Economic theory isn't the only body of knowledge that's been used inappropriately. We can trace much of the problem with twentieth-century thinking to the inappropriate use of imagery from the physical sciences. When an organization is productive and well coordinated, Westerners tend to describe it as "running like a well-oiled machine." But machine imagery has serious drawbacks. All the parts of a machine carry out unvarying tasks, and these are coordinated by control systems to optimize efficiency. The machine is impersonal, highly adapted to its current role, and has only one way of doing things.

When this metaphor is applied to organizations, workers like Joe are seen as cogs in the machine, each carrying out specific tasks. It doesn't matter who carries out a task, but it's very important that the task be carried out exactly as prescribed. Thus, each organizational role is carefully designed so as to optimize efficiency, and workers are interchangeable so long as they're proficient at the task. This creates the role of "worker-as-robot."

Managers' roles in this system are almost as constrained. Their primary mission is to provide machine maintenance -- to ensure that work continues according to plan. To accomplish this, managers are organized into a hierarchy with the most comprehensive responsibilities at the top and the most task-specific at the bottom. Each manager's job is to assure that the machine runs smoothly, with no interruptions, departures from design parameters, coordination problems, or disharmony.

The problem with a machine, of course, is that once it's designed and built, it stays fixed in form. It doesn't adapt its basic structure as everything around it changes. And the machine can never be better than its design. Yet in reality, organizations are relational systems that don't operate according to the laws of physics or mechanics. It's empowered workers, not hierarchical system designers (such as industrial engineers), who are in the best position to achieve continuous improvement, responsiveness to customers, quality, and efficiency. They make these efforts when they feel included as members of an organizational community (as Josephine does) -- but not when they feel like cogs in an impersonal machine.

The shortcomings of the old paradigm are evident when we consider that few conventional organizations ever achieved greatness, and those that did usually excelled in spite of their structure rather than because of it. These shortcomings are also evident when you ask Americans to provide examples of high-performing systems -- situations in which they were drawn into the excitement of a group operating at the outer limits of achievement. They almost invariably pick examples outside of business -- the crew of a racing sailboat, a set of strangers striving to cope with a disaster, a surgical team, a race-car pit crew, or a group of neighbors helping to raise a barn.

This isn't surprising: there's a lot of evidence that conventional Western businesses don't bring out the best in people. A song that had the title "Take This Job and Shove It" became very popular in the United States, because it conveyed a sentiment that most U.S. workers could relate to. As further evidence, bosses are usually portrayed as oppressors in U.S. folklore. And many workers who have the potential to be good managers recoil at the thought of taking on the role: the social status doesn't compensate for the bad relationships they expect will develop with the people they now work with.

It's important to note that the only time businesses are described as high-performing systems is in the case of certain start-up companies. In these examples, egalitarian groups exert their maximum effort and can achieve astonishing results. The people may be working harder than they would in the worst nineteenth-century sweatshop, but the work isn't drudgery: it's exhilarating. But start-up companies aren't organized according to old-paradigm principles. The workers tend to have strong inclusion bonds, high commitment, unstructured roles, and a sense of commonwealth -- if the enterprise prospers, it's to everyone's credit and to everyone's advantage. You don't hear these people humming "Take This Job and Shove It" as they watch the clock creep slowly toward quitting time; you're more likely to hear them saying that they work 80-hour weeks because they can't manage to work even longer hours.

Clearly, something's wrong with the conventional Western body of knowledge about organizing a business. What's wrong is that scholars haven't given enough attention to business relationships -- relationships between people, within and between groups, and within and between organizations. Economic theorists assume that relationships are basically adversarial as people pursue their self-interests. Organization theorists have looked primarily at structural relationships in machine-like systems, deriving a rather sterile view of the interconnections in organizations. Yet you know from your own experience that in reality, people form much more complex relationships than scholars have given them credit for.

We'll explore what's wrong with the way Western managerial thought developed, and show that naturally occurring human systems -- such as those that form in the best start-up companies -- have the greatest potential to be high-performing organizations. When we remove the distorting lens of the old paradigm, we'll recognize that people have an instinctual drive to form communities rather than hierarchies. That's why managerially naive people (like many successful entrepreneurs) create communal forms of organizations, which consist of networks of relationships rather than layers of hierarchy.

The New-Era Commonwealth Organization

When organizations are communal rather than hierarchical, managers have very different roles. Their primary objective is to preserve the cohesion and stability of their work group. They need to make people feel fully included, foster a strong sense of commonwealth, and prevent cohesive coalitions within the organization ("ingroups") from destructively excluding nonmembers ("outgroups"). This book explains how they can accomplish this.

New era managers also need an understanding of how webs of relationships take shape and operate. We'll explore why the new organizational forms do a better job of creating value for customers and clients, and why they're able to compete successfully against the less-adaptive conventional organizations.

We'll also develop an understanding of how managers can evolve their own units to operate less like an outdated hierarchy and more like a state-of-the-art communal form. Most managers aren't given a "green field" organization -- one with no structure already in place. Those who are lucky enough to have them -- such as those involved in start-ups -- encounter pressures to turn them into conventional organizations when they grow to a size that's difficult to manage informally. So, in practice, the majority of Western managers find themselves saddled with a suboptimal organization. They need to understand why it's suboptimal, and how it can be improved -- and positioned to succeed in the new era.

Said another way, new-era managers need to develop an alternative view of what an organization is. They need to visualize a network of business relationships that radiate throughout their own organization, and extend beyond its boundaries to other organizations in its value chain. These business relationships enable the organization to achieve strategic consensus, to implement strategy, to tie in strategic partners, and to achieve strategic dominance in the marketplace. Thus, managers in the new era don't establish, maintain, and manage relationships just to be nice. They do it because the strategic success of the business depends on it.

In fact, the most successful organizational forms of the twenty-first century will be extended enterprises. These aren't freestanding organizations, but rather sets of companies that each contribute value according to their distinctive competency. The participating organizations form a loose but enduring association of value-chain partners (i.e., associated businesses in supplier and customer roles). This network can even include competitors in domains where it makes more sense to collaborate than to compete.

The extended enterprise can create a level of value (quality, low price, fast time-to-market, and customer responsiveness) that no single company can attain. It achieves this high level of performance by taking the best that each participating company has to offer (for example, one contributing organization may be the best at research and development, another best at manufacturing, and a third best at distributing the products or services). In effect, an extended enterprise has all of the advantages of Japanese keiretsus. It may, indeed, be the only business form that can prosper in a global economy that is increasingly dominated by this interorganizational form.

The Central Importance of Relationships

If organizations are to be construed as networks of relationships, we'll obviously need to develop a sophisticated understanding of what relationships are. Conventional organizational theory hasn't paid enough attention to relationships. This neglect is an understandable consequence of having relied on mechanical metaphors. A machine designer cares only about the instrumental relationships between each component -- such as which driveshaft causes which gear to turn. But we need to go beyond this and understand the broader and stronger cohesive ties between individuals as these constitute the real organizational structure.

More specifically, we need to understand the ties that bind individuals to the organization, their work groups, and their peers. We need to understand the ties that bind groups together to operate cross-functional processes (such as how a customer order is handled on its way to becoming a completed delivery). And we need to understand the ties that bind organizations together in strategic alliances, value-chain partnerships, and competitive détente.

We also need to understand the divisive dynamics that undermine relationships. Some of these dynamics are inherent in the concepts Western managers use when they think about relationships. Many Western managers take for granted that the basic structural elements of organizational systems are hierarchies, markets, and contracts. This needs rethinking, because these concepts embody relationships that are inherently adversarial. Hierarchy is a power structure based on ownership rights. It exists as a means of control, enabling managers to force subordinates to obey. A boss, in this context, is an adversary to any subordinate who cherishes autonomy. Similarly, markets involve buyers and sellers striving to maximize their self-interest at the other's expense, which seems inconsistent with the notion of a value chain partnership. And contracts are adversarial in the sense that they're only useful in forcing the other party to accept a bad deal. (If it's a good deal, you don't need a contract to enforce the agreement!)

Many Western managers have accepted these adversarial relationships as "given." This is surprising because the same managers would view such relationships as pathological outside of a business context. That's no way to treat neighbors or family members, if you want to get along with them. Yet Western business education has taught generations of managers that such relationships are not only inevitable, but also desirable. Competition is revered as the central force in the free-enterprise system, yet competition is inherently adversarial.

In this book, we'll consider an alternative view -- that it's collaboration rather than competition that's central to any enterprise system, free or otherwise. Even if adversarial relationships can be a useful self-regulatory dynamic in markets, this doesn't mean they're useful elsewhere in business, as many Asian companies have found. The most familiar adversarial relationships -- hierarchy, markets, and contracts -- are usually an impediment to business success. In other words, Western businesses have prospered despite these dynamics.

Negotiation as a Key Managerial Skill

But even strong collaborative relationships are strained by conflict. As you know from your own experience, people don't simply form a relationship and live happily ever after. Strains arise whenever people have dissimilar views or interests. Because people aren't clones perceiving situations in an identical way, there'll always be strains in relationships. But this isn't much of a problem if they're managed well.

There are three basic alternatives for managing relationship strains: negotiation, conflict management, and power. Of these, negotiation seems to be the manager's best approach, using power the worst. Therefore, negotiation is a core managerial skill and is the one we will focus on in this book. In traditional hierarchical organizations, managers were able to use power as the primary means of resolving differences. But new-era organizations are flatter, they have empowered workers and they depend on cross-functional collaboration as a means of internal coordination. Managers have little authority over the people they're dealing with; therefore, they often have no choice but to negotiate. We'll see that negotiation is the process of gaining agreement on -- and, more importantly, commitment to -- the desired course of action.

Most of what's been written about negotiation emphasizes what people should do in one-time transactions with strangers. But think about it: this isn't what managers do. Managers usually interact with people they know well, and few situations requiring negotiation are one-time transactions. As a result, much of what you read is bad advice. The kind of negotiation managers really need to be good at -- relational negotiation -- is very different from transactional negotiation (which is epitomized by haggling over the price of a rug in a Middle Eastern bazaar). Relational negotiation involves working out agreements in an ongoing relationship, rather than maximizing one's outcome in a one-shot deal.

We'll also spend some time looking at how agreements are negotiated within groups. Twentieth-century organizations were designed as hierarchical arrangements of individuals. But people don't lead their lives as isolated individuals, on or off the job. People naturally form groups. Look at what you, yourself, do in a new social setting: a new school, a new workplace, or a new neighborhood. You join a group, or perhaps several groups.

In addition to having instinctual appeal to workers, groups are useful to management. Groups provide the collective expertise to make wise decisions that no person could make alone. Look at the examples in everyday corporate life. Task forces take on special analysis and decision-making assignments that can't be done effectively by hierarchical managers. Cross-functional groups achieve levels of coordination that elude managers relying on traditional command-and-control structures. Informal groups coalesce at every opportunity and can enhance -- or inhibit -- organizational functioning. I could go on, but you no doubt get the point. Because groups are all-pervasive, managers need to know how to influence their processes so as to maximize their benefit to the organization.

Managing in the New Era

The ability to manage relationships is essential for carrying out the manager's primary function, integration. Let's see how. Managerial effectiveness involves integrating a set of factors that determine the organization's ability to adapt to an endless stream of new challenges. But before we explore the importance of each factor, let's review how the notion of the manager as integrator evolved.

During the latter half of the twentieth century, several scholars developed models for how to align the various factors that managers need to pay attention to. Alignment is important. Systems of all types need to be in balance. Scholars recognized early on that strategy and structure needed to be aligned. That is, some structures won't let you achieve your strategy. Suppose, for example, that your company makes a simple product that will absorb food odor in a refrigerator. The product is simple because all you really need is a package filled with a highly absorbent substance -- baking soda or charcoal. You need to produce the item cheaply, which requires large quantities. And you need to sell it at such a low price that other competitors will figure it's not worth entering the market. This is a strategy. A conventional hierarchical structure is probably appropriate to achieve this strategy. There's little need for innovation, so managers need to give primary attention to controlling -- making sure that everything comes out according to plan. The strategy calls for "a machine" that'll turn out identical products, year in, year out.

But suppose instead that you're operating a hospital emergency room, and your strategy is to give priority service to patients with the most-urgent needs. A hierarchical structure won't help you because priorities can change within minutes, each situation is unique, staff need to be instantly redeployed as new patients come through the door, and being effective at saving lives may mean being inefficient in serving particular patients' needs. The structure is amorphous and flexible -- and it needs to be, given the strategy.

The need to align structure with strategy was so intuitively appealing that scholars soon identified other organizational arrangements that needed to be "in sync." Many managers are familiar with the 7-S framework, for example. The seven elements that need to be integrated are strategy, structure, systems, style, staff, skills, and shared values. Other scholars have questioned whether these are the most important elements, but no one has doubted that the various factors -- whatever they are -- need to be aligned with one another. If parts of a system are badly mismatched, then the system as a whole won't work as well as it could.

The 7-S model needs to be updated. The organizational success stories that gave rise to the 7-S model were stories of the 1970s. The world has changed radically since those days, so managers need to align a somewhat different set of elements.

Notice that customers are given their rightful place at the very top of the figure. They're given such prominence because, ultimately, the organization's survival and prosperity depend on how well it meets customers' needs. You, yourself, will stop doing business with organizations that fail to meet your needs. You'll avoid flying on poorly run airlines, you'll switch doctors, you'll decide not to take particular courses, and you'll stop shopping in stores with low value or bad service. If enough customers respond the same way when the organization does a poor job of meeting their needs, it will go out of business. That's how market mechanisms operate.

Organizations lose customers when they fail at creating value. The basic plan for how to create value is a central element in the organization's strategy. Managers need to agree on things like whether the organization is positioned as the low-cost producer, the technology leader, the most dependable supplier, or the firm that caters to a specialized clientele that nobody else is serving adequately.

In practice, what actually creates value for customers is a set of processes. Traditionally, scholars have focused on the products and services that organizations provide when evaluating market appeal. But it's more insightful to focus on processes. Suppose, for example, you need a hotel room for business travel. Objectively, you're renting a bed. But you don't experience the bed most of the time you're using it, because you're asleep. What creates value is efficient processes. You want to go to your room as soon as possible: you don't want to stand in line waiting to register. The same is true at checkout time. And you want room-service meals to arrive at the time you asked for them, not within a half-hour "window" that maximizes the hotel's convenience. Processes create value.

Processes are now recognized as being so important that most organizations have gone through "reengineering." This involves systematically analyzing key business processes, then figuring out how to improve them. Done properly, a reengineering program aligns processes with strategy. An organization can't achieve its strategy unless the right processes are in place. And organizations gain competitive advantage when their processes create greater value for their customers than do those of competitors. For example, Saturn Corporation gained great market penetration in the United States when it offered customers a better process of buying or leasing a car.

Next, the manager needs to have the right organizational architecture in place. Architecture is similar to what twentieth-century theorists called "structure," but its meaning is broader. Structure focuses attention on a single organization. The term "architecture" encompasses all of the organizational arrangements needed to carry out the processes that create value. This may involve several groups, several departments, or even several companies.

For example, people in the United States used to go to hospitals, clinics, or doctors' offices to take care of their medical needs. These were independent organizations. Now they're more likely to be dealing with an HMO (a health maintenance organization), which has very different architecture. To manage an HMO you have to coordinate the processes, products, and services of insurance companies, pharmaceutical companies, the federal government, employers, and networks of hospitals, clinics, and doctors -- with the needs of patients. The lack of integration in the old system of health care delivery made it too expensive for the value received. The HMO, when it works well, makes health care more affordable.

When processes and architecture are in place to carry out the strategy, the manager's attention can turn to securing the right resources. These fall into two basic categories -- human and nonhuman. Human resources consist of enough people with the appropriate skills to do the organization's tasks -- working effectively in groups (it's groups, rather than individuals, that carry out processes). Nonhuman resources include such things as the budget, physical facilities, time available, and the raw materials and tools needed to do the job. Coordination involves ensuring that enough of these resources are available to carry out value-creating processes that will implement the strategy.

Systems need to be in place to ensure that strategy is being implemented on time, efficiently, and according to plan. Perhaps managers' most important system is the control system -- the mechanism for determining whether specific objectives are being accomplished. Performance appraisal, quality control, budget compliance, environmental monitoring, and financial audits are all control systems. They tell managers when things are going well, and alert managers to problems that are developing. Additional systems need to be in place, such as management information systems and communication systems.

It's especially important for the manager to make sure that systems are tailored to processes. For example, if strategy implementation requires a collaborative process between managers, but systems reward each manager individualistically, then the misalignment of systems and processes will undermine cooperation. Surprisingly, such misalignment is fairly common in Western businesses, even though it puts these organizations at a competitive disadvantage.

Finally, managers need latitude to make the decisions that they're in the best position to make. They also need to be able to delegate decisions to their workers when subordinates are in a better position to make these decisions. Such latitude is known as empowerment.

I know it sounds obvious that decisions ought to be made by the people in the best position to make them. But for the last century and a half, decisions have been made at the highest -- rather than the lowest -- levels, reflecting a belief that a manager who isn't "calling the shots" is either out of control, irrelevant, or a wimp. None of these characterizations is necessarily accurate. Managers are doing a good job when there's continuous improvement. It turns out that the people who are actually doing the work are in the best position to know how to improve things. So if workers aren't allowed to make decisions, the only improvements that'll be made are those that somehow come to the attention of higher-level managers. Thus, empowerment is a source of competitive advantage because it's the key to continuous improvement.

Integration, in practice, involves working sequentially through the model. It starts with strategy, shown at ten o'clock in the figure. The organization's strategy will determine what processes are necessary to create value for customers. The processes will drive architectural form: they'll tell you who needs to be involved, and how. The resulting organization will have to be properly staffed and supplied with the other resources it needs. Systems will have to be put in place to ensure that the strategy is being implemented efficiently. And the people involved will have to be empowered to achieve the continuous improvement needed to stay ahead of competitors -- which is a key objective of an organization's strategy.

The arrows that show the sequence of coordination depict a cycle. Integration isn't something a manager does once and for all, as in the case of designing a machine. Each element in the cycle needs to be constantly monitored and adjusted because businesses operate in a constantly changing environment. The competitive landscape shifts, new processes are introduced, architecture evolves as better suppliers replace mediocre suppliers, resources become scarce or abundant, new systems are made possible due to technological evolution (bar codes and embedded smart chips might be good examples), and empowered workers make adaptive changes. Managers may need to compensate for the change in any element by appropriate changes in other elements, so as to restore alignment.

Managers must pay close attention to alignment since it's the organization's ultimate source of competitive advantage. Doing well isn't enough in today's global marketplace: you always need to do better. Competitors monitor a company that's doing well (they call it "benchmarking"), and they try to copy whatever's creating competitive advantage. If you're constantly optimizing and realigning each factor, by the time competitors have caught up with what your company used to be doing, you'll have become even better. So then they have to reach for the higher standard you've set. If you do a good enough job of staying ahead of the competition, they'll get discouraged and shift their efforts to another market niche. Thus, excellence and continuous improvement are great "barriers to entry" into any company's domain, and perhaps the only source of competitive advantage these days.

Relationships and Alignment

Relationships are at the center of the model. This surprises most Western businessmen, who are more used to focusing on structures, controls, and economic variables. It doesn't usually surprise Asians: they'd be surprised if relationships weren't at the center of the model. Nor does it surprise most Western women, who tend to be more like Asian managers than like Western businessmen. We'll discuss this gender difference later in the book, because it's an important one. For now, we'll focus on which relationships are important, and how they shape the way managers achieve alignment of the key factors we just discussed.

The most familiar relationships are those between individuals. But individuals also have a relationship to the group, and to the organization. Think about loyalty, for example: a manager can be loyal to the organization, to his or her work group, and to another manager. Groups have relationships with other groups: they can be allies or rivals. Groups also have relationships to the organization: they can be strong contributors -- as in the case of high-performing teams; or an internal opposition -- as in the case of a sullen work group that conspires to hold down production. And organizations can have relationships with each other: they can be archcompetitors, arm's-length buyers and sellers, or strategic allies. All of these relationships need to be created and maintained if the manager is going to be effective at integrating the various factors in the model. Here's why.

Relationships are important in achieving strategic consensus. Strategy is relatively easy to formulate. What's tricky is getting other managers fully committed to achieving the strategic objectives. If they "buy into" the strategy, they'll be more likely to "go the extra mile" to ensure that it gets implemented. They're unlikely to exert extraordinary effort if they have no sense of "ownership" -- such as when they feel others made the decision and their input wasn't even sought.

Commitment has its deepest roots in relationships. People need to experience a sense of inclusion and commonwealth if they are to become committed to a course of action. You can't expect much commitment from them if they feel like cogs in a machine, or like "outsiders" paid to carry out someone else's directives. Neither of these will generate the enthusiasm and ingenuity needed to overcome the obstacles that inevitably arise in implementation. So, if relationships are exclusive rather than inclusive -- such as when an elite group makes strategic decisions -- top managers will have to depend on power and control to get the strategy implemented. That's a costly way to execute a strategy. And it's usually ineffective.

In Western businesses -- particularly those based in the United States -- exclusion is the rule rather than the exception. A common rationale for excluding people is that if word leaks out and competitors learn what the strategy is, they'll counter it. In some cases, this is a real risk, and full participation would require the kind of relationship that would ensure confidentiality. In many cases, however, the risk of leakage is just an excuse, because the strategy has already been announced to the world in the company's annual report. The real reason top managers don't want broad participation is oldthink. They were socialized during an era when management made all the decisions and workers were kept in the dark. It's macho -- as well as ego enhancing -- to be calling the shots. But even when the strategy must be kept secret, people can participate in decisions about how best to implement it. Meaningful participation is valuable because of the relationships it generates.

Processes are carried out by groups. The groupings may be simple or complex. A simple group is involved in the process of getting your car serviced at the local dealership. It involves a service manager scheduling the appointment, a mechanic working on the car, a cashier collecting your payment, and a data-processing person entering information relevant to the car's warranty. If group relationships are good, everyone works together, and your car gets serviced efficiently. If group relationships are poor, and employees don't work well together, you'll spend a lot of time waiting unnecessarily.

A complex group may involve people from different departments, or even different companies. Look at the process of getting an aircraft ready for takeoff after it has just arrived from another city. On-time departure requires close coordination between gate agents moving passengers off and on the aircraft, the cleaning service, the refueling service, the catering service, pilots, flight attendants, baggage handlers, air-traffic controllers, maintenance mechanics, and possibly deicing crews. If relationships with any of these groups are bad, the people involved have the ability to delay departure. All they have to do is follow their job descriptions to the letter, refusing to make adjustments to accommodate other groups' tasks. That's enough to disrupt air service and snarl busy airports that already have problems keeping planes flying on schedule. The all-important cooperation depends on the relationships with the groups involved in the process.

The importance of relationships is fairly obvious in the case of organizational architecture. In new-era organizations, a network of contributors -- rather than a machine-like structure -- delivers value. As a result, relationships are vital. In conventional hierarchies, coordination comes from bossing people around. Conventional boss-subordinate role relationships were adequate for doing this, but they didn't have any effect beyond the organizations' boundaries. Today, managerial coordination may need to extend beyond the conventional organization chart, so different kinds of relationships are important. Competitive advantage often comes from strategic alliance as well as from excellence and continuous improvement.

We'll see that the value-chain partnership is one of the most important of these new-era relationships: networks of organizations and their suppliers create competitive advantage when they jointly strive to outperform rival value chains. For example, the casual observer might perceive competition between Ford and Toyota. In reality, the competition is between the Toyota value chain and the Ford value chain. The source of competitive advantage may not lie within either Ford or Toyota, but rather in the contributions of their suppliers. Thus, a collaborative relationship between the networked companies is absolutely vital to success. For these reasons, it's not an overstatement to say that relationships are the most crucial element of organizational architecture.

It should be obvious that relationships are important in managing human resources. This is where many Western businesses fail miserably. Look at how management and unions deal with each other in most Western countries. Managers see -- and treat -- their own workers as the enemy. These workers, in turn, behave like an enemy, shutting the manufacturing facilities down through strikes, and creating bad publicity intended to turn customers away from their employers. Both parties are usually at fault for this bad relationship, which saps competitive advantage and leaves the workers, as well as the employer, worse off.

Relationships are also important in managing nonhuman resources. Managers have to give people the resources they need -- such as time to do the job and the funds they need to do it. But how these resources get used depends on the relationships involved. Two bad relationships, from an organizational standpoint, are exchange and entitlement. An exchange mentality leads managers to put in extra time only if they get extra money, or compensatory time off. An entitlement mentality leads managers to argue for the same resource allocation that other managers are getting, irrespective of their managerial need. In the context of these bad relationships, when resources become scarce, unit performance becomes depressed: managers say, "I did what I could with what you gave me." If the relationship were stronger, they'd respond with resourcefulness and extra effort. Despite this dynamic, Western reward systems tend to foster exchange and entitlement.

Relationships also determine the effectiveness of systems. Control systems, for example, are designed to ensure that objectives are being achieved. But the relationship between the people doing the controlling and the people being controlled determines the effectiveness of control systems. If the relationship is adversarial, the control system will be seen as a policing mechanism imposed by managers who don't trust their own people to do the job properly. Because the relationship determines how the system is experienced, it will determine peoples' motives in responding to it. When the relationship is adversarial, people will be motivated to outwit the control system. It's all part of the game when subordinates distort the inputs to the control system -- such as by "burying" true costs by manipulating accounts, falsifying time cards, and enlisting the support of co-workers in undermining the system. These tactics would be unconscionable if the relationship were different -- if there were a strong sense of inclusion and commonwealth.

Empowerment is very obviously a relationship-driven factor. Managers empower people because they want them to make their own decisions about how best to contribute to organizational success. The relationship with their manager determines workers' motive to make contributions beyond their job descriptions. Empowered workers with positive motives can improve the organization immensely. But empowered workers with negative motives don't want latitude to make their own decisions. They want to do the minimum, with no extra responsibility. As a customer, you've run into disaffected workers, who were obviously "just going through the motions."

When empowerment initiatives fail, there's a tendency for managers to blame worker personalities when the real problem lies in the relationship. You hear, "You can't expect much from the kind of people we have working here. They just want to put in their time and do nothing more." In response to this misattribution, managers reduce empowerment and increase control. This makes the relationship worse, and further diminishes competitive advantage.

The SPARSE Organization

The term "sparse" is chosen for two reasons. First and foremost, it extends the notion of a lean organization to the value-chain level. A lean organization -- like a marathon runner -- has little excess to carry around. There's low overhead, which allows the value chain to be profitable while offering high-value (low-price, high-quality) goods and services. And there are few encumbrances that would inhibit fast response. As a result, the value chain is very agile, and able to seize new opportunities and move quickly to counteract competitive threats.

For comparison, a wolf pack is sparse: at any moment, it may be spread out, but its members are lean and fast, and they can swiftly come together to concentrate their efforts. The pack can move around within vast territory, uninhibited by borders, seizing whatever opportunities arise. In the face of a threat, the pack either drives off the challenger -- or vanishes, only to reappear as a formidable hunting unit somewhere else.

The term "SPARSE" is also a mental checklist for you. To be an effective manager, you'll need to understand the Strategy; optimize Processes; manage the Architecture, both within your own organization and within the network of value-chain partners; ensure that the right Resources are in place; operate and evolve the Systems that facilitate strategy implementation: and Empower the people who will actually make the value chain run, adapt, and improve on a day-to-day basis. If one of these elements doesn't get enough attention, then the organization as a whole will be less effective; the same is true if the elements are misaligned. You'll also have to create, improve, and heal relationships within and beyond your organization's boundary.

The chapters in this book will provide you with key information on each of the elements of the sparse organization model, with particular emphasis on the relationships that underlie organizational functioning. Understanding the model and knowing how to align the elements can be your keys to success as a manager in the new era.

Copyright © 2001 by Leonard Greenhalgh

Table of Contents

Chapter 1: Managing In The New Era
Chapter 2: Relationships Between People In Organizations
Chapter 3: Relationships Involving Groups In Organizations
Chapter 4: Relationships Involving Organizations
Chapter 5: Managing Old Organizations In The New Era
Chapter 6: Managerial Negotiation
Chapter 7: Group Decision-Making
Chapter 8: Personalities And Relationships
Chapter 9: Rethinking Management

What People are Saying About This

Michael Wheeler

A wise and practical guide grounded in rich, real-world experience. In the end, the author challenges us with insight and humor to see ourselves in new and more fulfilling ways.
—(Michael Wheeler, Professor of Management, Harvard Business School)

James P. Walsh

Shows how to create the kinds of relationships that sustain us as human beings and serve as a source of firm value—a wise and wonderfully accessible book.
—(James P. Walsh, Gerald and Esther Carey Professor of Business Administration, University of Michigan)

Robert B. McKersie

Much-needed. The quality of relationships, whether between individuals or institutions, ultimately affects the bottom line, and managers will find the analysis and perspectives of this author to be of immense practical value.
—(Robert B. McKersie, Sloan Fellows Professor of Management, Emeritus, Massachusetts Institute of Technology)