New business models - the management model

What is your management model?

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One enduring change in the management lexicon brought about by the dotcom revolution was the term business model—how a firm makes money. The concept had been in existence for decades, but the competition between "old" and "new" economy firms, with very different business models, helped to demonstrate its importance as a way of thinking about the basic choices firms make when it comes to their sources of revenue, their cost structure, and their make-or-buy options.

In the post-dotcom era, firms have continued to experiment with new business models, with some success. But genuinely new business models are hard to come by, and they aren’t as easily defended as they once were. Firms are therefore on the lookout for new forms of competitive advantage—they are looking for sources of distinctiveness that are enduring and hard to copy.

This article was originally posted on the Management Innovation eXchange (MIX), an open innovation project aimed at reinventing management for the 21st century.

One intriguing possibility, as suggested by many of the company stories described in the MIX, is the idea that a firm’s Management Model can become a source of advantage. In fact, I would suggest that asking, "What is your Management Model?" is almost as important as asking "What is your business model?" 

A Management Model is simply the set of choices made by executives about how the work of management gets done—about how they define objectives, motivate effort, coordinate activities, and allocate resources.

Notice two key features. First defining your Management Model is about making choices. In the airline industry there are several coexisting business models, and every firm knows it has to make an explicit choice about which one to adopt. Similarly, some industries already feature competing Management Models. For example, Linux, Google, and Microsoft all operate with very different Management Models (Linux is run through an open-source software community; Google has a highly-informal, university-like model; Microsoft has a more traditional, hierarchical structure), yet they compete head-to-head in the desktop operating system market. And Toyota operated for decades with a different Management Model from those of GM and Ford, despite having a very similar business model.

Second, we can put some structure around the concept by suggesting that the discipline of management has four specific dimensions. Managers have to decide where their organization—or their department or unit—is going (define objectives), and they have to get people to agree to go in that direction (motivate effort). The means by which they do this is to manage across (coordinate activities) and to manage down (making decisions).  The framework, illustrated below, helps make this clear.

The four dimensions of management

The four dimensions of management
For each of the four dimensions, it is possible to identify different principles by which that activity is undertaken.  On the left side, we see what might be called "traditional" principles that everyone can recognise. On the right side, we see "alternative" principles that are less well-known but are arguably more relevant to today’s fast-moving business environment. 

  • Choices about how activities are coordinated in the firm. Do managers focus on using formal and well-structured management processes to deliver outputs?  Or do they encourage a process of informal and spontaneous coordination through mutual adjustment?
  • Choices about how decisions are made in the firm. Do managers take personal responsibility for decision making, and rely primarily on their own deep knowledge and experience?  Or do they prefer to tap into the disparate knowledge of their subordinates and assign collective responsibility?
  • Choices about the nature of the objectives the firm pursues.  Do managers have a clear set of short-term goals for the firm? Or do they pursue an oblique, or indirect, path through the definition of a higher-level and longer-term set of objectives?
  • Choices about how individuals are motivated to pursue these objectives. Do managers attempt to hire and retain good people by making extrinsic rewards, such as salary, benefits, and bonuses attractive? Or do they focus on intrinsic rewards such as the opportunity to contribute to society, a feeling of achievement, or peer recognition?

Of course the alternative principle in each case seems more alluring, but actually I don’t believe all firms should be seeking to move that way—the traditional principles have served large successful firms such as Exxon and Walmart well for decades. The point, rather, is to suggest that by understanding the spectrum of choices available, executives are in a position to make more enlightened decisions about whether and how to change.  It’s also worth noting that these are rarely either-or choices. In many progressive firms managers are attempting to do both— to motivate people through a combination of intrinsic and extrinsic rewards, for example.  In my experience, firms never reach a position of delivering on both sides to the maximal level, because they involve tradeoffs and choices.  So it is useful–for the sake of exposition–to consider the two poles on each dimension separately.

The bottom line here: there is no sure recipe for success in developing your management model—there are many valid approaches—but one sure recipe for trouble is to not give some considered thought to the choices you are making.

Questions to consider:

  • What's the best way to balance traditional and "alternative" Management Models?
  • How would you initiate the conversation about evolving your Management Model in your organization?
  • What's more important: business model or management model? And how are they linked?
  • What examples have you come across of particularly effective Management Models?

About the author

Julian Birkinshaw - Julian Birkinshaw is Professor of Strategic and International Management at London Business School. He is co-Founder and Research Director of the Management Lab (MLab). Julian’s main area of expertise is in the strategy and management of large multinational corporations, and on such specific issues as corporate entrepreneurship, innovation, subsidiary-headquarters relationship, knowledge management,...