I have studied organizations, people and motivation and am fascinated by the changes that have unfolded in my relatively short career. I’ll defer to Neils Bohr to qualify this entire piece:
Most people agree that that change is happening and that the pace of change is accelerating. However, if you look around, our modern organizations are not much different than they were 20 years ago. When I talk to people and HR leaders about their organizations they share with me the feeling that something is not right and that organizations need to evolve.
I’ll get to my vision of that future, but first wanted to call out three trends that I believe are driving this uncertainty. These are trends that are equal parts powerful and also hard to notice on a day-to-day basis:
1. Increased competitiveness: In the 1920’s, the average lifespan of a company on the S&P 500 was 67 years. Now? 1 company is dropping off the S&P 500 every two weeks!
2. Open Talent Networks: Individuals are increasingly becoming aware of their own market value thanks to resources like Glassdoor and LinkedIn. This information is not perfect, but it’s getting better. As more talented people realize they are worth more, they will seek to maximize their value either by switching to a new job, or as technology continues to facilitate a freelance path — go it on their own.
3. Dis-aggregation : Paul Graham had an excellent essay on what he called “the refragmentation” (see here). A key insight was that organizations are setup to minimize transaction costs (coase theory). Technology has dramatically reduced the cost of doing business across many industries. While still substantial, scale advantages will continue to diminish.
Your counter argument is that we have some of the biggest companies ever, right? Yes, this is true in a monetary sense. But in terms of number of employees — not even close. in 1979, GM had 853,000 employees. Now? 215,000. The historical GM is now a complex supply chain consisting of hundreds of companies across the globe.
Your second counter point may be the observation that the biggest firms seem to be getting bigger or merging with other big companies. On this, you are also correct. Between 1997 and 2012 the share of the top four firms’ revenues has risen from 26% to 32% of total industry revenues.
The employment trends also tell the same story:
So where is all this freelancing and disruption that everyone in Silicon Valley promised us?
A lot of it has yet to be realized, but we are seeing evidence of it across industry (with the tech sector leading the way).
I believe that “aggregation” and “dis-aggregation” can both exist within the same industry. In fact, it may signal a more stable strategy for our economy. Nassim Taleb offered the image of a “barbell” in his book Antifragile to talk about a two-sided investment strategy. I think this image of a barbell also offers a compelling vision for firm and industry dynamics more broadly:
I initially used the image of the barbell to describe a dual attitude of playing it safe in some areas…and taking a lot of small risks in others…hence achieving antifragility. That is extreme risk aversion on one side and extreme risk loving on the other, rather than just the “medium” or the beastly “moderate” risk attitude that in fact is a sucker game (because medium risks can be subjected to huge measurement errors). But the barbell also results, because of its construction, in the reduction of downside risk — the elimination of the risk of ruin.
In the book, he discusses how systems become more stable through a healthy amount of fragility — meaning that continual shocks (companies going out of business in this case) make the overall system stronger. So in a hypothetical industry, there will be a small number of firms that have disproportionate power, but also a very large number of small firms that will be more volatile. These small firms will be ready to pounce or merge when the larger firms stumble.
This could also be a winning strategy at a firm level. Google moved in this direction with its newly re-organized Alphabet. It has a central large operation, but a separate arm to incubate its early stage investments such as Nest, Fiber and Calico. Many firms are taking the route often espoused by Clayton Christensen — of setting up completely separate business units that may or may not cannibalize its central operations — as a path for long term survival.
Setting up this barbell approach internally will not be enough for success for big firms to stay on top.
Four Factors of Thriving 2025 Firms
From the successful companies I have observed, studied, or worked at, I believe there are four elements that will drive successful firms in 2025. These firms will be a roadmap for large firms to maintain power and for smaller firms to take to disrupt the big players:
1. Process Excellence — According to BCG, firms are becoming 6.7% more “complicated” every year — a measure of the number of layers, procedures and decisions within an organization. Technology has no mercy for the organizations that continue to complicate. Sub-par processes cannot hide (think cab companies) and firms will decreasingly find protection from existing structures and regulation. Healthcare is a perfect example. A hospital resisting a new process to save lives could still succeed in the 90’s but will have a tough time in 2025. With increased transparency of outcomes, entrepreneurial physicians will spot an opportunity to take a different approach and move to a more innovative practice or start their own. Across all industries, firms will have a tough time retaining high-performers if they are not continually evolving on processes and operational excellence.
2. Purpose-Driven Cultures — Apple is the world’s most valuable company. It’s no surprise that they are synonymous with “think different” and “making the world’s best products.” Some of the smartest people I know now work for Apple — I don’t think that’s a coincidence. John Kotter did a famous study that found purpose-driven companies returned 10 times more than non purpose driven companies over a period of 10 years. Millennials are driving a lot of this change — they make up more than half of the workforce already. Deloitte found that 87% of Millennials believe that “the success of a business should be measured in terms of more than just its financial performance.” In 2025, organizations will need to answer the question: Why are we here?
3. Adaptive Technology—Legacy IT systems don’t cut it anymore — they are too costly to maintain and don’t align with a fast moving processes. In 2025, technology will have to both simplify processes (save time) and enable continuous improvement. Having the wrong system will be costly. Upstart competitors will do the same thing in half the time and half the cost and put you out of business (Compass is a good example of this in the real estate industry). Companies will have to rely on custom and proprietary solutions that can evolve fast and help generate revenue itself. This is Amazon.com’s strategy. It systems are the backbone and driver of continuous improvement on its its e-commerce strategy, while also being a generator of revenue (its Web Services business generated $7.8 billion in 2015!)
4. Agile Teams—In writing about his experiences with transforming the modern military organizations, General Stanley McChrystal’s wrote a book and introduced the concept of “Team of Teams” (here is a great podcast on it). During the Iraq war, the traditional command and control organization did not cut it. This shift was necessary to deal with the information-rich environment in which they operated. They needed to have flexible and autonomous teams that could make decisions quickly but be able to extract the information from other teams and the central office. As the working world continues to become more complex, being able to deploy the right team in the right situation will become more important than ever. It is also imperative not only to attract the best people, but to have the best people working on transformative new ventures that will drive growth. For example, MasterCard tapped into the power of FinTech startups by launching an internal startup accelerator. Google is going one step further and letting employees craft their own roles (in my mind, this helps overcome some of the obstacles of top-down org design). Not being limited by traditional roles and hierarchy and creating more agile teams will be an imperative for high-performance teams in 2025.
These four factors are not the only factors that will determine success in 2025, but a failure to succeed on any one of these four will put you at risk for being disrupted well before 2025.