Until recently, the core principles of management had hardly changed since the innovations conceived by former General Motors chairman Alfred Sloan. And indeed, there had been little need to upend these tenets, since the underlying logic of business had changed only in scale, pace, and complexity. The interactions at the heart of economic and business activity—those involving talent, consumers, suppliers, and markets— had shifted, but they had done so at a gradual pace.

The operations of most of today’s successful companies would be broadly familiar to a manager from Sloan’s era. They are highly evolved versions of their mid-20th century ancestors. Business units that manage employees, husband capital, and strive to minimize costs are still the bedrock structure of most of the business world. Corporate hierarchies ferry vital information and enforce internal discipline, while a strong asset base helps ward off new competitors. Beyond their walls, companies segment markets, set prices, and enter contracts to manage their dealings with customers and suppliers.

Over the last decade, however, the stable environment in which companies have flourished has been changed by technological innovations, globalization, and continued specialization. Advances in information and communication technologies (ICT), most visibly illustrated by the Internet, are at the center of these changes. Transaction costs have tumbled in this wired world, and nearly ubiquitous connectivity has made new and unexpected connections with customers, talent, and suppliers not only possible but easy. Digitization has changed the economics of creating and distributing products, services, and content across a growing number of categories and has the potential to revolutionize business, managerial, and organizational models. Inevitably, new kinds of companies are evolving to take advantage of these opportunities. These companies exhibit not only novel business models but are guided by new management principles that challenge the fixed orthodoxies on which Sloan-age companies were built.

We have identified a number of such orthodoxies that describe how companies have traditionally engaged in competition, created value, and managed themselves. Some of these ideas are explicit mantras that many companies hold dear, while others are implicit but evident in the way many companies operate. Challenging these orthodoxies offers companies new ways to promote growth and an opportunity to discover more innovative business models. Organizations that stick with the status quo may find themselves losing to new competitors who are unencumbered by old tenets and instead embrace this new era’s managerial and organizational freedoms.

How companies compete

In textbook economics, companies produce goods and customers pay in arms-length transactions based on prices. Producers and consumers rarely interact. But interactive technologies now let companies “mass engage” customers, using these interactions to design, customize, and market their products. Consumers have become an important source of value that companies are now enlisting to compete more effectively. For example, Internet start-up threadless.com uses the Web to solicit T-shirt designs from consumers and then produces those designs that receive the most votes from its online community. Nokia’s Beta Labs Web site lets users test its latest smart-phone software and rate new applications; the site generates a million page views each month. Research shows that these kinds of efforts can improve the productivity of research and increase the effectiveness of innovation.

In the orthodox view, competitive advantage also depends on ownership of assets. To capture economies of scale, companies must own their own production facilities and distribution channels while also accumulating intellectual capital. But technology has prompted new ways of thinking about corporate assets. Suddenly, sharing assets may generate more value than hoarding them. Amazon.com, for example, has broadly opened its asset base-—both physical and intangible—to online businesses. The retailer provides access to its warehousing, shipping, order taking, and payments systems as independent services. Netflix shares versions of its data base with its customers to improve the algorithm it uses to understand user preferences.

Global competition, meanwhile, is evolving. Companies can now expand in offshore markets by duplicating their strengths at home, including factors such as favorable access to labor and capital, knowledge of market patterns, and regulatory frameworks. But a new crop of competitors is literally being “born global”; these companies know how to create global networks, supply goods, and tap labor instantly. New competitors in China and India are now using information technology to develop extreme low-cost business models. For example, by using highly developed IT services and a low-cost infrastructure, India’s ICICI bank has become the country’s largest private bank, serving 20 million customers who were once considered too poor to be served by commercial banking institutions.

How companies create value

Free goods or labor clearly did not figure into old models concerning how companies can create value. Old thinking assumed that all workers shun nonfinancial remuneration, that inexpensive labor is low-quality labor, and that customers equate value with price. But the Internet is changing these views. Online consumers expect free products, and the Internet obliges. How? The Net gives companies access to the entire global market, with distribution costs that are much lower than those for traditional products—distribution may even be free for digital products. Google is a signature example, offering its powerful search engine for free and monetizing it by providing advertisers with access to a world-wide customer base.

The guiding principle for most companies trying to maximize value today is market segmentation. They strive for blockbuster products or segments large enough to produce economies of scale in production, distribution, and advertising. Most can only maintain reasonable costs for sizeable blocks of product, so they neglect niche markets—the so-called “long tail” markets.¹ The upshot is heavy spending on product development and advertising. But the Web is changing that model, allowing companies to profitably identify and serve niche markets. Amazon is one of the most successful beneficiaries of such long-tail marketing, earning 57 percent of its revenues from products not widely distributed in stores. And Apple’s iTunes connects with the long tail of music buyers allowing them to build libraries from across the spectrum of music popularity.

The product cycle, where much of consumer culture is forged, is another area that is being changed by the possibilities created by the Internet. In traditional models, goods wear out or become obsolete, and buyers flock to new, improved versions. But product cycle issues don’t apply to some new kinds of products that are “wrapped” in technology. Think again of Netflix, which learns consumer preferences and becomes more valuable with use. And there are now online video game consoles that can be refreshed and improved with software updates over the Net throughout the course of the product’s life. This leads to a new sort of kaizen theory of products, where rather than degrade, products actually can be improved continuously.²

On the supply side, there are many dedicated individuals willing to work on the Web without remuneration. Some simply want recognition among their peers, while others see themselves as citizens contributing to a global community. Many spend hours adding to product reviews, providing information on how to use products (Lenovo), writing software, designing products (Lego), or contributing to Web sites such as Wikipedia.

The organization and how it is managed

Some years ago, Harvard Business School professor and business historian Alfred Chandler noted that, “The modern business enterprise is easily defined. . . . It contains many distinct operating units and it is managed by a hierarchy of salaried executives.” Little has changed since Chandler made that observation. Corporate hierarchies still control how information flows, decisions are made, resources are allocated, and incentives and sanctions are meted out within most businesses. But technology is now blurring these clear lines of authority. Social networks allow information to pass between knowledge workers, some of them outside company walls and many increasingly located offshore. Knowledge now frequently travels in unexpected patterns as well. Collaborative decision making and problem solving arise from these networks, often without mediation by managers.

Since the interactions that result from these social networks multiply a company’s knowledge base, companies have a strong incentive to nurture such collaborative efforts. IBM, for one, has gained attention with its company-wide collaborative brainstorming sessions, or “jams,” which encourage widespread interactions and information sharing. The idea of hard-wired full-time employees as the only key units of corporate hierarchies is also due for a rethink. Companies as diverse as Chevron and Johnson & Johnson are using Web-based innovation brokers to harness ideas generated by knowledgeable individuals who aren’t company employees. And to broaden internal decision making beyond those at the top of corporate pyramids, some companies are experimenting with “prediction markets,” in which participants place bets on future events such as quarterly sales results or a competitor’s price targets. Such prediction markets have been more accurate at forecasting certain events than professionals.

The flow and rhythm of company processes are changing as well. Data concerning sales, financial results, billing, inventories, and the like currently make their way to managers only periodically; this is why most companies formulate strategies, manage operations, and deliver products in batches. It has been expensive to collect and distribute fresh data broadly throughout an organization—until now. New technologies and the increasing instrumentation of business processes have made data abundant and allow it to move more rapidly than ever before. Devices such as radio frequency identification (RFID) chips, for instance, capture information from previously unreachable sources—a technique pioneered in the retail industry by Wal-Mart Stores. At companies as diverse as GE and Cisco, financial information is now disseminated in real time rather than to meet calendar deadlines. Strategic decisions can be made more swiftly when executives aren’t waiting for monthly or quarterly data to seep upward, and costs and investments decrease when companies are able to manage purchasing, inventories, and hiring continuously.

Could many of the functions of managers themselves be automated someday? Today top executives navigate uncertain waters and, when faced with information gaps, they rely largely on their instincts. But decisions based on incomplete information can lead to missed opportunities, misperception of risk, and investment in projects that don’t pay off. Companies are increasingly employing data-driven management techniques that harness large storage, resources, and data capture capabilities, and technologies allow for better visualization of data patterns. Companies with complex supply chains or millions of customers interacting on Web sites are now able to conduct “whole data” analyses in a way that yields deep insights and spots correlations that even experienced managers can miss. Management intuition may not go away, but in the future it will probably be supplemented with a much more complete basis of information that will result in better decision making.

¹ Chris Anderson, “The long tail,” Wired, October 2004.
² Hal Varian, “Kaizen, that continuous improvement strategy, finds its ideal environment,” New York Times, February 8, 2007.

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