Published Articles - Madhav Mohan - The Leader : Mentoring Services, Mentoring Workshops, Mentoring products- Articles / Audio / Video/ Posters, Lectures

Flat is in

Published in The Week, July, 24th, 1994

Wanted: People, who think more broadly, thrive on change, who manage process instead of people and who cherish teamwork as never before.

That could well be the kind of wanted advertisement put out by a new kind of company now taking shape in the developed economies - the Horizontal Corporation.

Some of the best-known international consulting firms are, in fact, raking in millions by advising companies to organize their operations horizontally. But what they and their client companies are quickly discovering, however, is that eliminating the traditional pyramid in favor of a more horizontal structure can often be a complex and painful ordeal. So don't rush to write the obituary for functional management, just as yet.

Two years ago I wrote an article entitled Change, Adapt or Die (The Week 4.10.92) in which the massive transformation in management was discussed at length. Today, this transformation has ballooned into nothing short of revolution! Unlike in the past, this time it is actually a series of simultaneous revolutions that has overwhelmed every market and industry.

Conventional wisdom has been stood on its head and accepted norms and mindsets have dissolved faster than drawings on the sand. Unsettling times, to say the least!

What are these so-called revolutions? Are they at all relevant to us sitting in our "Indian conditions are separate and different" ivory towers? I would hate to shatter the complacency that we labor under; but we are about to be swamped by the revolutions. We can't beat'em, so we had better join'em! But more on that later.

Globalization has revolutionized the thinking about markets. In the days of yore a market was just a place where people met to buy and sell goods. But the 20th century, with its astounding developments in transportation and communication, has changed the concept of a market radically: a market now became, primarily, a set of people who demanded or needed a particular product or service. The shift has been radical from place to people.

Yet, many times have I found that most of us have not quite grasped the significance of the change. Today, place and location are insignificant: anybody can buy or sell anything anywhere. The market is almost purely defined by the characteristics of people, not where they live or work. Put differently, distance and other geographic considerations are no longer a limiting factor for business. This is the true meaning of globalization.

Two factors need particular attention. Firstly, the dismantling of the iron curtain and the partial lifting of the bamboo and "Swadeshi" curtains have increased the size of markets by hundreds of millions of people. This has been as much due to economic restructuring as to political reform, both stemming from the realization that competition and free markets are the best way to attain prosperity.

Here I must refer to the "bogey" of multinationals sought to be raised by many politicians in India. They paint the MNCs as the incarnation of evil, bent upon exploitation of poorer countries by dumping low quality goods on an unsuspecting population and siphoning off scarce resources. While much of this may have been true in the past, it is now a thoroughly obsolete view.

The traditional MNC, as we knew it, is dead: in its place we encounter a polycentric internationalist, leaner and more efficient company concerned with quality and customer service. It earns over 50 per cent of its revenues from international sales and is as likely (if not more so) to be involved in services as it is in manufacturing. In my view, any business that is operating across national frontiers is an MNC: so Indian exporters are as much of an MNC as American companies!

The other factor facilitating globalization leads directly to the second revolution, that of computers and information technology. By now the fairy tale of computerization is old hat. We all know that information technology helps in improving productivity and efficiency. What we do not realize is the pace at which IT is moving or the impact it is having on our thinking, behavior or decision making time cycle.

The massive computing power now available at a fraction of its earlier cost has changed the face of communication technology forever. This is especially true for telecommunications. Computer networks today span the globe with ideas, information and transactions being passed back and forth at blinding speeds. In all these interchanges, written matter, pictures and sound can be incorporated and combined in an easy to understand manner.

For those of us who think that such a scenario is impossible in India for at least another five years here is a sobering fact: the National Stock Exchange featuring sophisticated computer, telecom and satellite systems designed to enable stock brokers to accomplish screen based trading is on the verge of commissioning. No doubt about it, the IT revolution is intensifying in India.

Globalization is therefore a reality and is intertwined with economics, politics and technology. But what does it mean for business? More specifically, what do these revolutions portend for management.

Firstly, we need no longer confine ourselves to our domestic or national markets. Indeed, the world is our market. However, the reverse is also painfully true: our own safe backyard is open to aggressive, customer-friendly competitors. Even our own countrymen are not going to buy swadeshi if choices which provide better value are available. For companies in India, competition is already becoming intense. Staying ahead of the competition, therefore, will be critical to success.

Secondly, the time available and necessary for decision-making is becoming smaller and smaller. This is exemplified by Toyoo Gyohten (former Vice-Minister, Ministry of Finance, Japan) who recounts a chat he had with a foreign exchange dealer. When asked what, in his opinion, is the long term, the dealer answered that ten minutes was long enough!

Thirdly, information technology now offers unprecedented potential for cost savings and productivity improvement. Detailed data about markets and consumer preferences make it possible to fine tune products and services exactly to the needs of customers.

The concept of virtual inventory, for instance, has actually been implemented by General Electric. With its virtual inventory management system, dealers do not have to stock the company's product; all they have to do is to tap into General Electric's computerized inventory network and enter the customer's order. From there on, the company's production and dispatch system take over and ensure that the right product is delivered to the customer's location. The savings in inventory carrying costs (and working capital in general) for both, General Electric and its dealers, can well be imagined.

Fourthly, large size is not a determinant of success any more. On the other hand, small companies now have distinct advantages: they can be more flexible, entrepreneurial and fast in servicing customers.

It will not be surprising if, in the next few years, the Tatas, Birlas and other large houses find themselves under siege in their own markets by dynamic first generation businesses. If mighty IBM could be humbled in its own PC market, a lot more turmoil can be expected in India!

Fifthly, intellectual capital is gaining ascendancy over other forms of capital. Virtually every product, service and process is congealed knowledge. Specialized knowledge is tied together with information technology to create not only marketable goods and services but also the actual processes that produce these products.

The traditional distinction between white-collar worker and blue-collar worker is therefore fast eroding. The knowledge worker is poised to establish supremacy in the workplace. In fact, the very nature of work has changed radically from physical and clerical work to knowledge work.

What these challenges have combined to expose is the inadequacy of traditional organizational structures to cope with the new realities. The hierarchical establishment is hopelessly obsolete; with its layer upon layer of managers, it is unable to respond to fast breaking developments. Finding alternative structures is therefore the ultimate management challenge of all.

For years, management researchers have been pursuing organizational structures relevant to the emerging information economy. Reengineering is one such approach that is gaining widespread acceptance the world over. Downsizing, designing for total quality and decentralization are some of the other trends.

But these do not go far enough. There is, therefore, an increasing convergence in views relating to the need to alter substantially the traditional organizational pyramid. The necessity to flatten the pyramid and to give primacy to managing across rather than up and down the hierarchy is becoming more pressing with each passing day.

Consultants Frank Ostroff and Douglas Smith of McKinsey and Co. have proposed the 'Horizontal Corporation' as probably the best fit for current and future business conditions.

Companies across the world, large and small, have adopted the horizontal corporation as the model for their survival and growth. While some have tried to become as horizontal as possible, others have implemented selected aspects of it.

AT&T, Motorola and Xerox are just three examples of companies reaping benefits from adopting some of the concepts of the horizontal corporation. For instance, some AT&T units are now paying bonuses to employees based on customer evaluations of the staff. And in giant General Electric, employees are paid on the basis of the skills they develop rather than merely the individual work they perform.

The benefits from systems like these which form the basis of the horizontal corporation, have ranged from elimination of entire levels of middle managers and bringing new products to market much more quickly to vastly improved employee motivation and productivity.

What, then, is the new fangled horizontal corporation?

Simply put, the horizontal company is one which has jettisoned the concepts of hierarchy and functional separation of responsibilities. It is flexible, is focused totally on the customer and encourages informality and diversity amongst its employees - all of whom are concerned more with processes than functions.

On an organizational chart, the horizontal corporation will look startlingly different: It might be a circle with smaller circles within it or it might resemble a leaf of clover; it might even be a dome. The one thing it will not be is a pyramid.

In its purest state, the horizontal corporation will have just a skeleton group of senior executives at the top performing support functions like finance and human resources. But virtually everyone else will be working together in self-managed, multidisciplinary teams that perform core processes, such as product development or sales generation.

As a result, there will be only three or four layers of management between the top management and the process line staff.

The implications of these new concepts for Indian companies, both old and new and big and small are considerable. The months ahead are going to be testing times for them as barriers to the entry of foreign companies have come tumbling down. Our own Reliances and ITCs are going to face near horizontal competitors very soon.

Though mindsets in Indian boardrooms are definitely changing, they are doing so slowly and reluctantly. Our managers are still stuck in their hierarchy and job title oriented thinking. Further, openness, transparency and full information disclosure are all heresies in even our most successful companies.

That's because virtually all Indian companies are typical vertical organization, in which staffers look up to bosses instead of out to customers. Employees feel greater loyalty and commitment to their respective functional fiefdoms rather than the company as a whole and its goals - the engineers still battle manufacturing and marketing with sales. And the financial naysayers fight everyone.

Also, companies still have too many layers of management, which slow down decision-making and lead to high coordination costs.

Mere downsizing, therefore, will do little to increase efficiency and productivity and change the fundamental way that work gets done. That takes a different organizational model - the horizontal model.

To survive in the face of the fast and furious onslaught from lean and nimble foreign competitors, Indian companies will be forced to embrace massive change quickly. One area that I have found to be disconcertingly true in many companies is the adversarial relationship they have with many of their key associates.

For example many companies have very abrasive relations with their distributors, dealers and franchisees. Most often the approach of company personnel to their distributors is one of win-lose; win for the company and lose for the distributor. Ultimately the relationship has to be based on win-win. Currently, however, this is sadly lacking.

So the task for Indian companies is as clear as it is difficult; they have to adopt as many of the features of the horizontal corporations as they can, as soon as they can.

And once the concept takes hold, almost every aspect of corporate life will be profoundly altered. Jobs will be lost, privileges will vanish, establish ways of doing business will disappear, career graphs will become horizontal instead of vertical - all of which will be extremely traumatic to everybody concerned. But there really are no other options because the near horizontals from abroad are at the front door. We have to become near horizontals too.

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V.K.Madhav Mohan - The Leader : Mentoring Services, Mentoring Workshops, Mentoring products- Articles / Audio / Video/ Posters, Lectures