Beyond Systems Theory

In 1990 Peter Senge had just finished writing the manuscript that would become the celebrated management book, The Fifth Discipline, the Art and Practice of the Learning Organization. All that remained for the MIT lecturer and systems scientist to do was find someone to write him a short preface.

Thinking back to that time, Senge confessed, “there was no one I would rather have write something than Dr. W. Edwards Deming,” the man who was “revered around the world as a pioneer in the quality management revolution.” Senge could think of “no one who had had a greater impact on management practice.”

With this in mind, Senge wrote to Deming but with little hope of getting a reply. Aside from the fact that by this point Deming was long retired and almost 90 years old, as Senge put it, “I doubted that a letter with such a request from an unknown author, referring to a work with which Deming was unfamiliar, would get a favorable response.”

Senge was wrong. Much to his surprise a few weeks later he received a letter from Deming. Senge hurriedly tore open the envelope and as a measure of the impact of Deming’s letter, after reading the one short paragraph it contained, Senge said, “I had to stop to catch my breath.” Why? Because in that short paragraph Deming had delivered an assessment of the impact of his life’s work, and the unmistakable conclusion was that he had failed. Deming’s exact words were:

“Our prevailing system of management has destroyed our people. People are born with intrinsic motivation, self-respect, dignity, curiosity to learn, joy in learning. The forces of destruction begin with toddlers—a prize for the best Halloween costume, grades in school, gold stars—and on up through the university. On the job, people, teams, and divisions are ranked, reward for the top, punishment for the bottom. Management by Objectives, quotas, incentive pay, business plans, put together separately, division by division, cause further loss, unknown and unknowable.”

It was clear from Deming‘s damning assessment that in his twilight years, the god of systems theory had realized that systems were not enough. Deming realized that his project had been wrecked by the failure to place an equal emphasis on transforming the mindset of staff and managers, or in other words, the organizational culture.

Synthesizing Deming and Drucker

Evidence of the effectiveness of the kind of equal emphasis on culture and systems that Deming had in mind could be found at Intel Corporation under the stewardship of CEO Andy Grove.

The Silicon Valley firm’s CEO had been influenced by Peter Drucker, the acclaimed Austrian-American Management consultant who was famous for focusing on the human element of the management equation. “I am more interested in people than I am in how businesses work,” Drucker declared.

In contrast to Deming, who claimed that “a bad system will beat a good person every time”, Drucker confirmed his relative indifference to systems theory when he added, “The task of leadership is to create an alignment of strengths …making a system’s weaknesses irrelevant.” No surprise then, that famously for Drucker, “Culture eats strategy for breakfast.”

But Grove, like Deming, was also an engineer and a physicist. He was initially Intel’s Director of Engineering, while his book The Physics and Technology of Semiconductor Devices became a college textbook on the subject. It is therefore understandable that Grove never adopted Drucker‘s somewhat cavalier attitude towards systems.

Thus Grove embodied the emphasis on both systems and culture that Deming had called for in his twilight years. Or as Intel chairman Andy Bryant put it, “he combined the analytic approach of a scientist with an ability to engage others in honest and deep conversation.”

Going beyond Deming and Drucker

But Grove was not content to simply synthesize the ideas of Deming and Drucker without evolving them. For example, in a move that would have appeased Drucker, Grove did not seek to replace or further complicate existing methodologies governing specific functions such as production, quality, or innovation.

Instead, Grove’s methodology worked as a kind of meta-alignment architecture, capable of aligning staff at all levels, projects, and whatever methodologies governing company functions were in vogue, with the priorities that flowed from the CEO’s vision.

For the same reason, it was an approach to management and self-management that was necessarily easy enough for anyone to use, universal enough to serve as a common language, and efficient enough to avoid adding bureaucracy.

But then in an act of siding with Deming over Drucker, Grove rejected the link between objectives and rewards that Drucker advocated and Deming had criticized. Grove did so because he understood that fear of failure would lead to less risk-taking.

Grove also agreed with Deming‘s call to drive out the kind of fear that stopped subordinates from delivering bad news to a manager, which in turn would leave the manager in the dark.

But Grove stopped short of buying into Deming‘s more general call to “end fear in an organization“, because he saw complacency as one of the biggest dangers organizations faced. Thus, Grove argued that some fear is healthy, especially in organizations with a history of success. Or as Grove famously put it, “Only the paranoid survive.”

The continental influence

It’s easy to understand how Grove concluded that only the paranoid survive by looking into his past. Grove arrived in America as a refugee after surviving first the Nazi and then the communist occupation of his native Hungary.

The same upbringing in Budapest presumably accounts for why Grove’s management approach also appears to owe something to the Continental Rationalists instead of just the stark empiricism that underpinned thinking in the Anglo-sphere.

For example, according to Grove, market disruption was not only inevitable but desirable. “Every business has the seeds of its own destruction,” said Grove, because “the more successful you are, the more people want a chunk of your business, and then another chunk, and then another, until there is nothing left.” Which, according to Grove, was an opportunity to adapt and find an even higher level of success.

No wonder Professors Chou, Cheng, and Hwang, of the National Taiwan University singled out Grove along with Steve Jobs in the paper, Dialectic Leadership in a Contradictory World, as two leaders who exhibit a “dialectical worldview that resonates with the Hegelian Dialectic under certain conditions.”

Grove’s philosophical interpretation of market disruption served as the organizing principle for his third book, Strategic Inflection points. It was a work that became the favorite management book for many of both the old and the new guard of tech industry leaders, including Steve Jobs, Larry Ellison, Bill Gates, Bill Campbell, and Mark Zukerberg.

Andy Grove and Steve Jobs

Unfortunately, to the wider audience, the book must seem very bland indeed thanks to an act of friendly fire on the part of the publisher who overruled Grove and imposed the title High Output Management on the book instead.

As a result, it is not immediately apparent to the uninitiated that Grove’s management theory incorporated a page from idealist philosophy – which is an inclusion that makes Grove’s approach all the more intriguing given it did not constitute a work of theoretical speculation. After all, unlike the theories of most management gurus, Grove’s approach was forged by the real-world experience of running a corporation.

It was an approach that was also subjected to the most severe of stress tests that began during the 1980s, and ironically it was a test brought about by the most fervent advocates of Deming‘s approach – none other than the Japanese memory chip makers. As such, this was a test that was perfectly calibrated to pit Grove’s balance of empiricism and crypto-continental rationalism against the pseudo-physics and uncompromising empiricism of Deming.

Entering The Valley Of Death

The stakes were high. The Japanese strategy of undercutting whatever price Intel set by a flat 10% was designed to turn Silicon Valley into “The Valley of Death” and Japan into the center of the computer chip business.

Thanks to the government subsidies enjoyed by the Japanese firms, this was a price war that Intel could not win. But despite this, because of Grove’s approach to management, including his philosophical outlook on market disruption, leadership of the tech industry was a prize the Japanese memory chip makers would not be able to claim.

Grove began by asking Gordon Moore, co-founder of Intel, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Without hesitation, Moore answered, “He would get us out of memories.” Moore was proposing that Intel switch focus from memory chips to microprocessors instead.

But while this might seem obvious in hindsight, at the time there was nothing empirically sound about making such a switch. This was before the PC revolution, and as Professor Nalebuff of the Yale School of Management explains, “second sourcing had created multiple competitors, and a downturn had led to excess capacity.”

As such, at that time Moore’s suggestion amounted to the kind of a priori thinking that Deming was famous for airily dismissing with the mantra, “Without data, you’re just another person with an opinion.” Fortunately, Moore wasn’t talking to an arch empiricist. After taking a moment to consider Moore’s words,  Grove looked up and replied, “Why shouldn’t you and I walk out that door, come back in, and do it ourselves?”

As history records, Grove’s leap of faith combined with his faith in the ingenuity of labor rather than cheap labor would pay off. The workforce at Intel made microprocessors progressively faster and more affordable, giving rise to the legend of Moore’s law and helping fuel the very PC revolution that lit the blue touch paper for Intel’s success in the microprocessor business.

At the same time, Grove’s management methodology allowed intel to pivot with agility to make what had been a secondary business line the main focus of the enterprise while simultaneously limiting exposure to the memory business.

As venture capitalist Ben Horowitz explained, the outcome was that “Intel, and as a result, the US, ended up being both the center of the microprocessor market and also the center of the PC industry. In turn, this led to [the US] being the center of the internet – making Grove the foundation of the US leadership in technology.”

One can only wonder to what extent Intel seeing off the Japanese play for supremacy of the tech industry played in Deming‘s final disillusionment with his systems theory. It’s difficult to believe it had no part to play given that in no country in the world was Deming more revered and his practices more influential than in Japan. To this day the Japanese Union of Scientists and Engineers continues to award the Deming Prize for contributions to the Total Quality Management system that Deming invented.

But truth be told, by the time Deming wrote to Senge in 1990, he had seen enough. As Senge confirms, Deming had become so disillusioned with his own system that he’d “almost completely stopped using the terminology of ‘Total Quality Management’, ‘TQM’, or ‘TQ’, because he believed it had become a superficial label for tools and techniques.”

The end of an era

Deming passed away three years later in 1993. Sadly, it was only enough time for him to realize that the CEOs weren’t listening to him anymore. But neither were they listening to Andy Grove, the man who had outmaneuvered and seen off Deming‘s epigones. The CEOs didn’t need to. Because in 1991, one year after Deming wrote to Senge, and two years after the fall of the Berlin Wall, the Soviet Union collapsed. Under the mantel of globalization, what followed was an unprecedented era of business process outsourcing. 

For decades to come executives of listed companies were able to meet the perennial shareholder demand for maintaining and growing profits by leaning heavily on the option of ‘downsizing’. The euphemistic drapery would inevitably wear out requiring the contriving of new terms. Downsizing would become optimization, then transformation, but the esoteric intent of reducing the wage bill remained the same.

By 2016 the phenomenon had become so widespread that an Accenture study found that 82 percent of the 700 senior executives involved in the survey “aimed to cut costs to fuel growth”. No surprise then that somewhere along the way, rather than being a company builder, in many cases being an effective cost optimizer became the decisive measure of an executive’s track record.

Meanwhile, oblivious of Deming‘s repudiation of his own systems theory, for generations of people managers the acme of people management became freeing themselves from the task of managing people. Instead, they worked to transform their operations into self-managing systems, recreations of the clock-work celestial systems that had inspired systems theorists in the first place. 

Adding to the resolve of the managers in this regard was their uncritical acceptance of the conflation in systems theory of immanence with command and control. The outcome was staff left increasingly baffled by the spectacle of managers trying to outdo each other in transcendental remoteness, the brevity of their one-on-ones, and the terseness of their one-line emails. Needless to say, none of this could last.

The return of the company builders

Today, we are assured that we are in the midst of the transition from the industrial to the knowledge economy. Everyone sagely nods their heads whenever the slide appears but without ever asking the obvious question, “why now?”

The answer is that the outsourcing wave couldn’t last forever. The outsourcers will no doubt continue to find ever more ingenious ways of reducing the wage bill. But after thirty years of continuous outsourcing, clearly, the great bulk of cost reductions have been made. The same dynamic applies to the covid-induced tsunami of digital transformation. By this point, cost reductions achievable through digital transformation are well and truly subject to the law of diminishing returns.

Until such time as the much-vaunted but yet to materialize wave of bots shows up to enable another round of wage bill reductions, the new generation of executives is presented with a challenge. Quite simply, how will they continue to satisfy shareholder expectations without being able to depend on business process outsourcing and digital transformation as their predecessors were able to?

It is a moment vaguely reminiscent of the 2010 transition of government in the UK when the incoming Chief Secretary to the Treasury found a note left for him by his predecessor which read, “Dear Chief Secretary, there’s no money [left], kind regards and good luck!”

Incoming Conservative Prime Minister David Cameron pointing at the infamous note

Only in this case, the note to the new generation of executives from their outgoing predecessors reads, “there are no more jobs left to outsource, good luck!”

But with Grove’s philosophy in mind, the new generation of executives need not be daunted. Because surely, no more jobs left to outsource constitutes a strategic inflection point if ever there was one, and therefore a moment that should be embraced as an opportunity.

In this case, it is the opportunity for the new generation of executives to avoid the fate of having to spend their days publically proclaiming that the workforce is the source of all value while privately trying to fire as many of them as possible. Given the personal conflict that must go with having to play such a duplicitous role, one does not envy the job of a cost optimizer.

Instead, the new generation of executives is free to pick up the torch from the executives who preceded the age of outsourcing. Like them, they are free to build enduring legacies they can be proud of based on being company builders.

As for a tool to help them align the entire organization around such a vision, they should consider the goal-setting methodology inspired by Grove’s own approach to management, the man who when he passed away in 2016 was described by venture capitalist Marc Andreessen as “the best company builder Silicon Valley has ever seen, and likely will ever see.”

That methodology is known as Objectives and Key Results, or simply OKRs.

Ravi Bains

by Ravi Bains
Gtmhub Content Manager & Storyteller


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