The History of Organizational Ownership
As we look over the past hundred years, we see a very specific and clear long-term trend from Centralized Wealth Creation and controlled economies to Decentralized Wealth Creation and free market economies, or Mass Privatization. Early “smoke-stack” companies vertically integrated the entire supply chain into one huge self-contained controlled economy, under one person’s ownership and control. This was the ideal towards which capitalists strove.
When the Industrial Age or Mass Production era was in its prime, those like JD Rockefeller crushed their entrepreneurial rivals, drove them out of business, purchased the remains of their businesses, and then hired the former entrepreneurs as controlled and controlling bureaucrats within their companies. The name of the game was to control as much of an economy as one could. One of the many entrepreneurs driven out of business and vertically integrated into Standard Oil was forced to become a bureaucrat controlled by Rockefeller. He commented, “This is downright undemocratic, it’s an infringement on my freedom.” He was exactly right.
With vertical integration we bought and sucked up whole small businesses, broke them up and put their resources into defined departments or bureaus of specialty (marketing, production, sales, engineering, quality, accounting, etc.). It turned owners into representatives and entrepreneurs into bureaucrats.
Vertical integration disguised customers and suppliers in the supply chain as employees. The Industrial Age was based on the idea of vertical integration. Henry Ford had a factory that was miles long, starting with iron ore on one end and automobiles rolling off a production line at the other. He even owned the mines where the iron ore came from, as well as the rubber plantations for tires in South America.
The history of the ownership of companies, at the height of the Industrial Age, was one in which an owner like Ford owned the entire supply chain. Over time, free market forces compelled ownership to be diluted into the hands of more individuals through stock ownership. Then, rather than one owner, there were thousands of owners. Then came employee stock ownership—programs where employees owned percentages of companies, or even the entire company. Later came profit sharing and franchises. Recently, there has been an explosion of variable-pay private ownership or value-added compensation programs. These allow the individual to more directly own a percentage of the wealth he or she produces. They include gainsharing, at-risk pay, team-based pay systems as well as incentive, pinpointing and bonus programs.
Each of these progressive steps from control to liberation was not necessarily desired by companies and owners. The market demanded them. For example, a public corporation could raise the capital needed to seize opportunity much faster than a company who attempted to maintain sole ownership and complete control. Through natural selection, the public corporation, therefore, became be the norm. And today it is this natural selection process which will cause the end of the controlled economy and the rise of the Mass Privatization organization. Companies like Nucor Steel and Lincoln Electric have thrived while many in their industries have gone under. A five year study by the National Center for Employee Ownership concluded that companies with employee ownership and participation financially out perform companies without these two. This is because non-owning employees are simply not able to meet customer needs as well as participating owners.
The History of Organizational Structure
Regarding vertical integration, what is occurring today is the de-vertical or horizontal integration of controlled economies as we move to the horizontal Mass Privatization structure, as shown in Figure 6. Starting with those like Rockefeller who owned the entire supply chain, perhaps the initial step towards horizontal integration came with outsourcing. Here, more owning suppliers were introduced into the supply chain. External companies (owning suppliers) rather than controlled bureaucrats performed more of the work of the supply chain. Today, there are no companies globally which own more than a fraction of a total supply chain, with the work of the vast majority of all supply chains being performed by many different suppliers. It simply became more profitable to control less of the wealth creation process. Either companies de-vertically integrated or went out of business. “To be in control today is to be out of control” (Peters 1992).
Perhaps the next big step was franchises. Kentucky Fried Chicken has ten thousand restaurants, with many thousands of small owners. Franchising, uses more real owners in the wealth creation process, in order to expand rapidly to meet customer needs. However, the operations are out of the control of the founding organization. The other option is slow growth and tighter control. Price Club was the first company to pioneer the brilliant wholesale warehouse concept. It seemed destine to dot the entire U.S. landscape with Price Club warehouses. However, in 1993 it was announced that, due to a fall in earnings, Price Club was merging with Costco. The decline was due to slow expansion when an onslaught of competition from Sam's, Price Savers, Pace and the like entered the wholesale warehouse business. The Prices stated that the reason for the slowness and ultimate fall was the moderate pace of expansion that was prudent and necessary to ensure that management had tight control over operations. Today, tight control over operations is a sure road to decline. Again, “to be in control is to be out of control.”
In recent years, there has been a flurry of activity towards horizontally integrating controlled economies including core competencies, profit centers, business units, horizontal organizations, self-directed teams, virtual organizations, network marketing, contract employees, lean manufacturing and more as shown in Figure 8 , page 6 . All of these concepts move us a step further away from the control of vertical integration and towards the liberty of free markets.
With some of the programs, many people are being downsized out of the bureaucracy to become business owners. With the collapse of the mainframe computer, IBM lost approximately 200,000 of its 400,000 employees. Many of these former bureaucrats and employees are now building and selling computers in their own one-person computer retail stores. The crushing weight of the free market is forcing bureaucrats back into the horizontal supply chain—an exact reversal of vertical integration.
We are emancipating capitalism. Just as vertical integration turned entrepreneurs into bureaucrats and clerks, horizontal integration turns clerks and bureaucrats into entrepreneurs. Perhaps vertical integration was mandatory in the Mass Production era because mass wealth and mass physical resources were required to produce wealth. However, with knowledge being the primary wealth creator today, vertical integration is obsolete. Individuals own the knowledge in their own heads, meaning by default, that individuals today own the means of production.
Books and Fads Shows the Trend to Mass Privatization
Books serve the purpose of documenting trends, activity and thinking in society. Prior to 1980, the number of business books showing new progressive thinking and activity was relatively small. It was a period of long stability and there was little need for new business theories, thinking and activity. There has been steady growth in business books since the early 1980’s, which has exploded within the last few years. Since 1990 many new publishers of leading edge progressive but widely accepted business book have entered the market—the likes of Berrett-Koehler, Executive Excellence and Butterworth-Heinmann.
It is imperative to understand that each book concerning business or social change represents thousands of hours of thinking, researching, reading and collaborating focused on a specific issue. Today's explosion of books, from hundreds of publishers, represents virtually all that is presently occurring in business, organizations and society. When we stop analyzing and step back away from the trees to see the forest, all of a sudden things come into focus and Mass Privatization is clear to see. We are discovering a completely new wealth-creation paradigm, one building block at a time.
The key here is to be able to synthesize the material being produced and make some holistic picture of the trends. When viewed collectively, they almost completely define the Mass Privatization paradigm. Figure 7 shows a small sample of the books published in the last few years regarding organizational and social change.
Many of the book titles are stretched beyond the content contained within that book. For example, the thought expressed in the title Businesses without Bosses is exactly where wealth-creation is going. The author, however, does not advocate a new form of business where managers and hierarchy do not exist. Although many of the books lack the substance implied in the title, the titles and hype nonetheless show the demand of the market and where we must ultimately go—what controlled economies are unable to completely deliver. A mere review of the titles provides an excellent indicator of the direction and degree of change.
In 1990, when the Mass Privatization concept clicked in my head, I knew based upon intuition that it was the answer to our gridlocked system of work. After the weakness I'd witnessed in companies and my own business struggles, I knew that personal ownership was the only way out. In the years since, while writing this book, I've watched as others discovered bits and pieces of the Mass Privatization paradigm. I would write about a concept such as alignment, infinite wealth, the death of bureaucracy, democracy within business and two months later, there would be an entire book being published on the subject. As that occurred repeatedly, in all segments of society, the evidence for the Mass Privatization concept became overwhelming.
We try bit and pieces of Mass Privatization, by drifting from one fad program to another. This is because of our Industrial Age analysis bias. Analysis is a slow and piecemeal thought process, which focuses on one thing at a time. We see the activity documented in these books as fad programs, which we try independently. They mostly fail within controlled economies because: 1) Mass Privatization cannot effectively be piecemealed, 2) most managers have little vision of what is occurring as they drift from one fad program to another, 3) much of what defines a controlled economy directly opposes the new free market economy. The very definition, foundation and core of a controlled economy are in direct contradiction with these concepts.
There are two common threads that run through all of the activity and fad programs in Figure 7 above and Figure 8 below. They are all customer-focused and/or free-market-based. If one simply listens to the terminology of the many management programs one can easily hear the demands of the market, and what controlled economies are unable to provide. The market is asking for a shift within the enterprise from employees to real business owners, real internal suppliers and customers chains and real partners. Real profit and loss is being demanded instead of salaries, hourly wages and standardized compensation. The market is dictating a move away from supervisors, hierarchies, regulation and control to freedom, liberty and opportunity for all. Perhaps we could ignore one book or one fad program or even a handful. However, we cannot ignore it when the totality of business publishing and activity points towards Mass Privatization.
Customers are the Driving Force behind Human Liberation
The driving force behind the shift from controlled economies to free market economies is the natural desire for human freedom. Because of our analysis bias we seek to separate concepts like human liberation from business. However, today the most powerful branch of the human liberation movement comes directly from customers as they seek more freedom, options and choices from suppliers.
The controlled economy is a system established for a seller’s market, from a sales paradigm, when sellers controlled the economy. Centralized Wealth Creation is a foundation where a relatively few sellers could determine how, where and when everyone else’s needs would be met—internal and external customers. We have, in fact, had a “bureaucrat-driven market.
In a seller’s market, the seller mass-produces the same product for everyone regardless of the individual’s unique needs. The seller then charges the highest price the market will bear. It is a market where lead times are long. Sellers produce in large batches at their own pace and convenience. The vast majority of customers are controlled by and report to the single, monopolistic seller (the bureaucracy). It is an economy of stability, standardization and mind-numbing conformity. Quality is sacrificed at the expense of production and productivity. The seller’s market organizing system is the foundation upon which our industrial society rests.
The seller’s market foundation is not inherently bad, just primitive—having been created two hundred years ago. As we evolved from the scarcity of the Agricultural Age, buyers were glad to get whatever they could. Technology and human advancement were limiting factors.
In 1800, typical Americans had less than 300 products to chose from in their hometowns. Things have changed. Today we have many suppliers and choices. The average American has easy access to over one million products, and many suppliers for most things. An average supermarket alone carries 25,000 products. Wal-Mart’s superstores carry 110,000 different items (Snider, Ziporyn, 1992, p6). However, all of our advanced technology, our entire production and wealth-creation systems, as well as all of society still rest on the rusty, primitive, bureaucracy-based seller’s market foundation.
Perhaps controlled economies could somewhat effectively manage a few dozen products and a few employees, mass-producing the same thing for everyone. Today we are asking it to effectively organize tens of thousands of products and people and to begin customizing for each individual customer.
It boils down to a matter of complexity. If companies were countries we would easily recognize the absurdity of central planning. In 1989 General Motors ranked as the 20th largest economy in the world based upon economic output. In fact, in 1989, 47 of the world’s largest 100 economies were corporations, not countries (Ackoff, 1994 p 147).
Today we know that countries are too complex to be run with systems of central planning and control, as we spent trillions opposing communism. We must come to understand that this is true of companies as well. How can we philosophically oppose a controlled economy such as Cuba or North Korea and simultaneously support the systems of a larger controlled economies such as General Motors, IBM or AT&T?
Americans use to wonder why tens of millions of soviet citizens supported a system that systematically limited their freedoms and wealth opportunity. Yet we do exactly the same thing, as we believe in companies as our primary wealth-creation institution. This shows the difficulty of attaining perspective within a paradigm.
At its core, Centralized Wealth Creation was evolved for a low-tech, low information, stable, stationary, illiterate, ignorant population with simpler and smaller systems. Today the population is more educated, mobile, versatile and informed. In addition, society has become more unstable, complex, interconnected, global, diverse, automated and advanced. As things have changed and evolved from the primitiveness of an early-stage industrial economy, there is only so far that a seller’s market foundation can be stretched towards a buyer’s market foundation.
If an economy truly had a buyer’s market foundation, customers would control it (this includes internal customers, today’s employees). Customers would have seemingly infinite choices and receive customized goods and services made specifically to their desires and receive them immediately with zero lead-time.
With the advent of the customer and quality movement sparked by Japan in the 70’s and 80’s, the seller’s market foundation has begun to crack. What was sparked by the Japanese has become a global state of chaos, with at least one new progressive management program introduced each week to better meet customer needs. With each failing program the cracks in the foundation grow larger as customer needs continue to accelerate and go unmet. Though progress is being made it is too slow and falls short of customers’ needs. We normally do not notice this shortfall because we are not really concerned with meeting customer needs. Because of the win/lose competitive paradigm we are only concerned with being a step ahead of the competition at meeting our customers needs. There are even entire value streams, involving dozens and hundreds of companies, missing the mark regarding what customers really want (Womack/Jones, 1996).
Today the Information Superhighway threatens to explode the cracked Industrial Age foundation and create a new foundation. As the Information Superhighway opens markets globally and puts the “mom and pop” shop on an equal footing with large corporations, it lays the foundation for Mass Privatization.
From a Mass Production to Mass Customization Worldview
The mass production system has run out of steam on the threshold of the 21st century. Its down fall is the fact that the American marketplace is no longer made of interchangeable customer. ... The old mass production system must be replaced. While a hierarchy allows management to control a stable, predictable Mass Production shop, it is the exact opposite of what is needed to empower a flexible, responsive workforce that is faced with a constantly changing marketplace. Mass-Customized businesses thrive on flattened hierarchies that give autonomy to groups. Each of these groups share information through communications networks so that each group is constantly aware of what it must do to respond to the new needs of the customer. … Believe it or not, flattening the hierarchy is the simple approach. The most drastic structural innovation is to shatter it into independent pieces. –Joseph Pine, Mass Customization.
The shift from a seller’s to buyer’s market foundation is far more than a shift in production systems. It is a shift from the entire mass production foundation upon which civilization rests. Everything from representative democracy, to our factory style schools to manufacturing, to our view of justice, to civil rights, to competitive sports are all based upon the outdated mass production paradigm. The shift from mass production will mean the end of all of these institutions.
We are shifting to a customer-driven civilization based upon a new foundation of mass customization. As shown on the Age Wave chart in Figure 12, page 6 , society has begun to shift from a Mass Production to a Mass Customization system of production.
Mass Customization is exactly what it says: producing in volume, but at the same time giving each individual customer something different according to his or her unique needs. With mass production everybody receives the same thing regardless of individual needs.
Not only is this a new system of production, it will also form a new worldview in which, for example, our notions of “fairness” and “equality” are challenged as we come to understand that no two people’s needs are exactly the same. Equality, the cornerstone of representative democracy, in which “all men are created equal” and must get equal treatment, loses its meaning. It is a primitive “given” today in industrialized societies that no person is superior to another. Equality is merely a mass production notion where the goal is to give everyone the same “average treatment.” People, however, have very different needs. Mass production then by definition means that people will not get their needs met. Mass Production operates based upon homogenous averages and majorities because at its core it is based upon reducing variation, while stabilizing, controlling and mass producing the same thing thousands of times. In addition, Mass Production not only does not need diverse brainpower, it cannot tolerate it.
The focus of mass customization is on meeting each individual customer’s unique needs. We are shifting to a new civilization which operates upon customization, variation, creativity, chaos and diversity. A mass customization era will thrive and flourish on diversity, diverse brainpower and creativity. If suppliers are going to customize to meet infinite variations of customer needs, then they will need an infinite diversity of creative intelligence to do so. The more variation the better. This can only come through widely diverse people, six billion strong, controlling the wealth-creation process. Comparing this to the mass production era, we see a system that was and still is controlled by one very small minority—middle-aged white males. It simply does not take a lot of diverse intelligence to ignore specific, diverse needs and mass-produce the same product millions of times.
Business managers and political leaders could be as brilliant as Einstein, as creative as Da Vinci, as results-oriented as Attila the Hun, as honest as Washington, with the political leadership skills of Lincoln and Jefferson combined. Still, Centralized Wealth Creation would not be capable of meeting the market demands of a mass customized market. The collective intelligence is too low and too limited. The complexity of the market and its size pits the brains of a relatively few bureaucrats against thousands of billions of people’s individual, unique, unpredictable, moody, subjective and changing needs.
There is only one force on earth with the intelligence, knowledge, flexibility and capacity to manage wealth-creation to meet these needs. This is the collective, diverse brainpower of the billions of individuals owning, planning and controlling work and wealth-creation, themselves, at the local level.
The intelligence found in diversity is the trait of the new mass customization era which will not only end racial, sexual and human division but also will cause us to embrace and thrive upon diversity. As mass customization flourishes through the freedom of the Mass Privatization enterprises, we will begin to see the end of racial division and racism as people begin thriving on diversity as millions of fortunes are made.
The new civilization is one that at its roots will drive people to help, understand and partner with others very different from themselves, because this produces more intelligence and wealth for themselves. Meeting others’ needs is already driving wealth-creation in an infant Information Age. As we continue down this path, wealth-creation becomes the driving force for human understanding, tolerance, empathy and harmony.
The seller’s to buyer’s market shift, the shift from mass production to mass customization and the ramifications for human growth, plus the end of human division and hatred are subjects deep enough for books of their own.
The Intelligence Needed for Mass Customization
With knowledge being the primary creator of wealth in the Information Age, business enterprises must have the ability to create very high levels of intelligence and must themselves be extremely intelligent. The company, with one person reporting to another and with standardized compensation, is specifically designed to have the people towards the top doing the thinking. There is a division of labor between thinking and doing. With a few people at the top doing the thinking and the masses at the bottom doing the actual work, we inherently have a dumb organization. There simply are not enough brains thinking. Milliken, the textile manufacturer, like many in the South, at one point actually called its production workers “hands.” As we move towards Mass Privatization, Milliken transitioned to calling workers employees and now calls their employees associates.
Though companies like Milliken have taken steps to become an intelligent organization, they, like all other controlled economies, can have only limited success. This is because of the inherent limitations of the controlled economy and the piecemeal approach to change. There are limits to which most non-owning public workers will engage their minds. In addition, there are limits to the amount of thinking and creativity that a controlled economy can tolerate when variation is, at heart, its enemy. Ask any manager how to best produce quality or maintain order in a bureaucracy and he will tell you that it is done by continually reducing variation.
Because of the inherent low intelligence of controlled economies, with the thinking being done at the top, the intelligence quotient of a company is only a fraction of the sum of all of the individual employee’s IQ’s. It is a system where 1+1=0.1. The vast majority of an organization’s intelligence lies in the frontline employees, simply because this is where most of the brains are. Assuming, as most managers do, that managers are smarter than frontline employees, a company of 200 frontline employees averaging an IQ of 100 per employee, has a total front line employee IQ of 20,000, not including any synergistic effect. Given that the controlled economy has seven very smart managers, averaging IQ’s of 125 each and a CEO with a 150 IQ, the collective management IQ is 1025.
Including supervisors, engineers and other specialists, the collective IQ of those doing the thinking, managing, directing and controlling is 2935. The IQ ratio between the “hands,” and the “brains,” are out of whack. The less intelligent (2,935) collective is thinking for, directing and controlling the far more intelligent (20,000) collective. The subordinate, passionless, ownerless position of a public worker renders the bulk of employee brainpower mostly useless. Though steps are being taken to involve and empower employees it is too little and too slow with customer needs not being met and untold wasted potential.
The Industrial Age operated using this dumb organization because it did not take a lot of intelligence to mass-produce at the seller’s pace and desire. It, however, takes lots of intelligence to produce at billions of individual customer’s pace and desire. The dumb “mass production-based controlled economy” is, therefore, exactly the wrong organizing system and foundation for a knowledge era, where ideas and knowledge create the bulk of wealth in society.
As we are move to an era where knowledge is the ultimate wealth creator, it is reasonable that organizations of the future will operate like the brain; since the brain creates knowledge.
I know that neuro nets are the appropriate organizational structure for a chaotic knowledge-based Information Age. When we look at the neural network of the brain we see the same basic pattern as the starburst organization. This is no coincidence. The organization of the present and future must be a naturally evolving learning organism. It must resemble the functions of a brain, including synergy, parallel processing, logical thinking, intuition, creativity and freedom of thought and expression.
The brain is made up of about 28 billion neurons or nerve cells. Neurons are tiny biological computers which, like personal computers, work off of electrical impulses. They are capable of processing about one million bits of information per second. It uses what equates to about 6,000 miles of wiring for each neuron. Though neurons in the brain act independently they also communicate with other neurons through a network of nerve fibers. Each human has about 100,000 miles of nerve fibers within their bodies (Robbins, 1991, p120). When we learn something, we create a physical connection between neurons called a neural connection.
Intelligence in a person is determined by how many of these paths of information there are between neurons. According to the National Academy of Sciences there are more possible connections in your brain than the total number of atomic particles in the entire universe (WOW!). The more neural connections we have in our brains the more intelligence we have to draw from and the more intelligent we are. The simple act of sharing information between two or more neurons creates intelligence. The same is true with people in organizations. Information technology is allowing humans to connect like neurons in a rapidly growing brain.
The brain utilizes what is called parallel processing, which is what gives it such power. Even though the brain takes a million times longer to send a signal than a computer switch, the brain can spread a signal to hundreds of thousands of other neurons in less than 20 milliseconds. Most computers operate based upon one step-at-a-time serial processing, just like the majority of activity within controlled economies. This is what makes bureaucracies and computers relatively slow. Parallel processing is simply the notion that several brains, neurons, computers or computer-processing chips can be working on a problem at the same time from different perspectives. By taking a number of people with aligned motives and providing aligned-incentives to openly communicate, parallel processing and synergy can naturally occur in organizations and society.
Synergy, knowledge, and intelligence are created when neurons communicate with each other in a brain. Likewise synergy, knowledge, and intelligence are created when people communicate with each other within an organization or society. In the organization, as well as the brain, the more neural connections there are, the more parallel processing there is, which means more communications and thus more intelligence and, therefore, more wealth created. By simply allowing, enabling and providing aligned incentive for communications and connections, in a system such as Mass Privatization, the communications and thus gross intelligence and wealth of the group is increased.
In addition, when it comes to intelligence we find that diversity is the key component that creates intelligence. As Don Carew, co-author of The One-Minute Manager Builds High Performance Teams says, “If two people on a team think alike, then one of them is not needed.” If all brains in one network think basically alike there will be less neural firings, brain stimulations, fewer perspectives and therefore less intelligence created than a network with more diverse brains. There will, therefore, be fewer ideas produced and they will be less varied than a network with more variety.
Organizations of the future must be designed for maximum neural connection development. The system must have natural alignment towards building and creating more and better neural connections, diversity and have incentives for parallel, chaotic, free and massive information flow. As Toffler says, “When information flows, cash flows.”
The structure of the controlled economy inherently inhibits the free and chaotic information flow required for a truly intelligent organization. Companies as intelligent organizations cannot reach their logical conclusion because of control. Even concepts such as open book management can have only limited success in controlled economies. After all, at the core of a controlled economy is control—including control of information flow. It is critical to understand that control is the very heart of the controlled economy and bureaucracy. When the degree of control, required for today’s intelligent organization, is taken away we no longer have a company by today’s definition. We have Mass Privatization. Without control we lose the notion of management, employees, salaries and far more—the very things that define a company.
Because of control, even the companies that are making a genuine effort to be intelligent organizations are only tapping the smallest percentage of their potential. Only through a system such as Mass Privatization, where individuals are free to and have the motivation to engage and dig deep, to freely connect, communicate and collaborate with one another, can organizations produce the intelligence to meet customer’s unique and customized needs.
Copyright 2000 by Barry Carter
