Chapter Five

On the topic of organizations of the future, which was our assignment, I thought I would check in with what used to be, or what is said to be, the relevant literature, and it took me back to some of the old classics, like Lawrence and Lorsch. And it turns out that the concepts of differentiation and integration have been with us in one form or another for a long time. Sometimes, they become decentralization versus centralization, other times loose coupled versus tight coupled. And the folks say that those are the right core things to do. To differentiate and integrate if organizations are to adapt to complex, changing environments.

But what didn't get said was how easy it is to do differentiation as compared to integration, for a number of reasons. One is the nature of upsets. It's the law of physics that things fall apart. Entropy. You test it by getting a jigsaw puzzle that's fully solid, you shake the box and look at it, you see what nature does to order. Or take a deck of cards that's in order, throw it on the ground, and pick it up and look at it. So nature is always helping you differentiate.

We often forget the difficulty of integration. The United States, for example, has been much better at attracting than at assimilating different groups. It's always had one of the most liberal immigration policies, but when people get here they settle down in Little Haiti, or Cuba town, or Korea town, or Japan town, or China town. We haven't been really slick at learning how to integrate this thing.

Which leads me to the second factor, demographics, that also helps us to differentiate. This country does have quite a variety of people, the law protects it, and it's a difficult thing to put things back together again. In addition, you have Generation X less susceptible, it seems to me, to doing things in any common, uniform way. So you look at the integration difficulties of running an American business, for example, in places like Japan, where the diversity is less, and a common mind-set is easier to instill.

So globalization then becomes another factor. When I was at USC, we got into IBEAR—that's the international business education part—and it's the same in corporations. I'm now with GE and it's trying to go heavily into places like Japan. This creates great differentiation and these things become very hard to manage.

And then another set of factors that promotes differentiation has to do with e-business. One of the great concepts emerging seems to be the notion of being an aggregator. It used to be believed that you had to know something about the stuff you sold: Maybe you had to know how to make it, maybe you had to understand your customers. None of that seems to be in vogue any more. So places like Amazon.com decided that the ideal business model is not to get good at selling books, but to get good at selling stuff. And the stuff you sell can apparently be independent—it can be anything—which introduces you to a great variety of customers, and again increases by far the differentiation and consequently the need for managing well.

Another property of e-business is the low barriers to entry. Compare a guy named DeLorean to a guy named Liemandt. Both wanted to get into the car business. DeLorean spent a fortune and turned out an unsuccessful car company. In contrast, Liemandt put up a Web site called pcorder.com, took it to market, and he's selling automobiles. You can sell anything on line. You don't have to know how to make it. You don't have to make it. You just locate it and sell it. Sometimes it never even passes through your company. So you end up with a huge variety of products and services and an infinite number of customers, and the end of all this is that differentiation is easier and easier to do—it's almost an automatic consequence of doing business.

Integration, therefore, is harder and harder to do. And, again, the Lawrence and Lorsch notion was that you needed integration, you almost needed a certain level of it, but the more differentiated you were, the harder it became.

Now my shop, GE, has all of these issues, plus it has another one, which is that we're in every product, every market, every technology, and every country there is. In Charles Handy's terms, we're the biggest elephant. In fact, by some measures such as market cap, we're the biggest elephant in the world—and by other measures, we're the biggest corporate enterprise in the history of the world. Other than a church or an army, there's never been anyone that's tried to run a shop this big. Just for an example, if you broke up GE into its natural parts, you'd have twenty-two Fortune 500– sized companies. Many would be in the top fifty by themselves. And if that's not bad enough, we're acquiring organizations at the rate of five every two weeks. A hundred and thirty last year. And they're not small because when you're as big as GE, it's three-fifths of the work to bring in a small business as it is to bring in a large one, and then you don't get any bang on your income statement or balance sheet, so you have huge problems around integration.

So an answer to what's the organization of the future is that the world is giving us hugely more differentiation than we've ever had, and the organizations that solve this puzzle, that are able to stay organized, will succeed. That's the problem of organization—how do you get common output when people have so little in common? And GE gets richly rewarded for giving the impression of having solved this.

In fact what Jack Welch drills into our cortex at regular intervals is this simple statistic: The average holding company or conglomerate sells at fifteen to nineteen times earnings. In Europe they get in the low twenties. GE, it depends on the stock price of the day, is at about forty-four to forty-eight times earnings at any given moment. We're also the world's largest market cap. Over US$550 billion. The point of this is that we get about twice what we would get if the world decided we were not integrated, or what Welch calls “boundaryless.” And so our biggest fear is if the world thought we were just a holding company, and yet if we're in every business and market and country there is, how can you be other than a holding company?

Which is to say, any decision you make, any action you take, any money you spend, if it makes you more integrate-able, which I'm going to call boundaryless, if it makes you more boundaryless or creates the impression that you are, don't even do the math, just spend the money. And so that's everything we do at GE. It's our belief about the organization, again more needed in a place like GE because we are more differentiated than most. But when the Amazon.coms of the world carry out their plans, they're going to have the same issues of differentiation. And the aggregators—this is going to become the way of life and doing business—are going to have those same problems.

So what we're pursuing at GE is that there are only three types of boundaries, according to Welch. One type is the floors and ceilings; that is the vertical boundaries that separate people by level. So every one of us goes home at night with information in our head that we know for certain would make our organization more effective, but we don't tell. Every one of us goes home with information in our head that would make our boss competent. There are things that you know about your boss's operating style that are just wacky. But you don't tell your boss because it's awkward. Our subordinates and students know the same things about us and they're not telling us. So imagine if all that good stuff could flow freely up and down the organization, if you could permeate the boundaries.

Inside walls separate the departments, whether it's a corporation or a university, the regions, the branches, the territories, the SBU's, the campuses. So English is resentful of Business, the West distrusts the Midwest, Sales doesn't like Production, everyone in the field hates the home office. This is how we all live.

And then the outside walls separate the organization from its suppliers, its regulators, the media, the shareholders, and in all cases, customers. So the GE answer is that those are the boundaries that you permeate. You never get there, but that is what the ideal form of organization looks like.

At GE, we say that there are only three tools to permeate boundaries. Integrated organizations move money, people, and ideas or information across boundaries. Even holding companies move money. Cash cows, growth engines, move money to other parts. That's important, everybody knows that. But what distinguishes the integrated organization or the boundaryless organization is the moving of people and ideas. In a holding company, you typically have what they call the silo or the chimney. In a boundaryless company, people move across those boundaries. And the same is true of ideas and information. At a place like GE, you make the assumption that what Plastics knows can help NBC, what Aircraft Engines knows will be fine for Capital, and so on. This is the essence of what we try to do.

I'm going to try to tell you, quickly because of time, how we try to do these things. There's an old saying that GE gets it right all the time but it doesn't. We make mistakes, just like anybody else. So, to permeate vertical boundaries, to make it easier for information to move up and down, we do things like Workout, which has been pretty well publicized in the press—the GE approach to moving down to lower levels in the organization autonomy, authority, and decision making. Again, a lot of the implications of this come from research, certainly Warren Bennis's earlier works have sought to explain it. My point is, therefore, not that it's new but that it becomes unusually important if you agree that differentiation is going up, if you agree that integration is critical, and one of the things you have to integrate is vertically across the organization. So concepts like Workout and e-business are having an effect. There is still as far as I know no rigorous research about the impact of e-mail on corporate communications. But the anecdotal evidence we get is that subordinates who are pretty intimidated to put something in writing or to say it face to face are happy to go online and send an e-mail note to tell the boss he's a horse's ass or something like that. So there happens to be greater irreverence, which is fine if you're trying to vertically integrate. Also, bosses seem more willing to ask for help and advice and to delegate and empower online than they are face to face. It doesn't seem so humiliating or something.

Inside the walls, everyone uses the same inputs. It doesn't matter what type of organization you're in, it could be a corporation or a university, and within a corporation it could be Plastics, NBC, or Lighting, it doesn't make any difference. For example, one input is people. Anybody in this room know how to get work done without people? Good, now we have something important in common. So if you have a good idea, say in a university in the Biology Department—where the business school doesn't look for ideas—for recruiting people, or tracking them, or retaining them, or mentoring them, or disciplining them, or anything, 90 percent of that turns out to be portable. Supplies are another input. Anybody know how to get stuff done without supplies? Great. Now we have something else in common. So if you're good at bids, or specs, or algorithms or prequalifying vendors, or running e-auctions, or all the other seventy-five best practices, 90 percent of that is portable.

Then, throughput. Welch is always saying, “While some of us are bending metal, some of us are paying claims. But you map the processes, and they are amazingly similar.”

And on output. There are only two kinds of outputs in this world: products and services. Whichever one you have, don't you still have to market it, don't you have to price it, whether it's tuition or a good? Don't you have to collect your cash, don't you have to quality control your product? Don't you have to have customer relations? That belief, that mind-set, we believe to be the conceptual underpinning of a boundaryless organization. But the biggest danger of these is the overhonoring and the overrespect for differences. Every specialty, every department is unique, every snowflake is unique, it's all true. But it's the enemy of having an integrated organization because you end up overhonoring and overrespecting people's differences and then you believe that no knowledge is portable. And the truth is that almost all knowledge is portable.

The last example is about the outside walls. By the way, these solutions are not unique to GE. These are just things that the organizations of the future are going to do or they're going to disappear. So at GE, for example, if you are a good customer like Wal-Mart and you ran out of stuff that you're buying from GE, you don't even tell GE about it, you just trigger your automatic signal to the GE factory and it will ship stuff to your warehouse. So you've got no inventory at your Wal-Mart and no paperwork or forms, you've got a customer now giving orders, not advice, not a plea, but orders, so the GE people can do some stuff.

Welch's one-liner about this is “If we do our jobs well, no one outside will be able to tell where GE stops and the environment begins.” It's a total blurring of the inside/outside lines.

Another example is part of Six Sigma, outsiders now have the power to evaluate and reward GE employees. This example goes beyond what I used to teach when I was at the university. If you're really going to be integrated across the outside walls, it goes beyond what I just said, it actually has to do with adopting your customer's objectives as your own. In a Six Sigma quality world, you view quality through the eyes of the customers. Most of the early stuff about zero defects in total quality failed because they were built on internal measures. So businesses thought they were doing great, but their customers never felt it. The whole notion is looking at things through the eyes of your customers.

My last example is called “wing to win” because it happens to come out of the aircraft engine part of GE. GE makes engines, customers put them on the plane. Periodically the engines have to come off the plane and go back to the service shop, where they are repaired, serviced, and whatever else people do to maintain an engine. You're always setting standards to minimize the time in the shop. So you go from nine days to seven days to five days to three days. That's the old way of looking at service to customers. Here's what it looks like through the customer's eyes: An engine leaves the wing of an airplane, it may be away for nine days. If that's the number of days the plane can't fly, then that's the number of days the customer has fixed costs with no revenue from that plane. Now you say: “But only five of those days the engine was in the repair shop, the other four days it's the customer getting it to you or taking it back, or they may have a warehouse problem.” When I think about things like MBO, you always talk about the accountability of goals, don't make people responsible for things beyond their control. But if you're going to be integrated across the outside walls, control has nothing to do with it. The dependent variable becomes how many days will that wing be off the engine. And all of a sudden now, GE is in there helping customers with their internal warehouse issue, it has nothing to do with anything we've committed to, but that's what the world looks like. Again, in Welch's terms, if you do a job right, you won't be able to tell where the corporation stops and the environment begins.

So in conclusion, the organization of the future still has to manage differentiation. That has not stopped being true. So integration becomes key but various forces conspire against it. Again, the more differentiated you are the harder it is to do. Boundaryless organizations can help resolve this dilemma.