Today, what determines the vitality of the organization?
The success of the organization benefits every member of the organization. As an important organizational form in the social economy, enterprises not only create economic value, but also provide a large number of jobs. A company with strong vitality brings benefits to society and individuals and is a necessary guarantee for common prosperity.
The value of an organization comes from its vitality. The life of an individual is limited, but a good organization can create value that transcends the times. For example, the Steamship China Merchants Bureau, founded in 1872, formed the first merchant fleet in modern China, opened China’s first bank and insurance company, etc., created the modern national shipping industry in China, and led many other modern times. Industry development. China Merchants Bank, the core asset of China Merchants’ financial sector, ranks in the forefront of the “Top 500 Organizational Vitality” list. Nowadays, after several restructurings, China Merchants Shipbuilding has transformed into China Merchants Group. After more than a hundred years, it still continues to serve the country’s economic construction.
In each era of great changes in species, the creatures that can survive and occupy the mainstream niche are not the largest and strongest creatures, but the creatures that can adapt to changes in the external environment the fastest. The same is true for organizational vitality. In today’s era of rapid changes in the external environment, organizations need to be able to effectively adapt to the environment to resist risks, rather than blindly pursuing enterprise scale and growth speed.
Professor Gong Yuzhen of Peking University pointed out, “A good company must establish a clear value proposition, outstanding vision, mission, and values. Only then can it truly form a strong incentive for outstanding employees and let them feel the meaning of their work. Let employees be willing to devote themselves. One of the main tasks of a leader is to find such a reason for each member of the organization to devote themselves to the organization from the very beginning, and to find the strong self-drive of the members of the organization.”
-01-Scale and speed are difficult to become a corporate moat
In the early days, most entrepreneurs and scholars believed that scale determines the vitality of an organization.
This is because, in the third industrial revolution that began at the end of the 20th century, computers and new communication methods have greatly expanded the scale of enterprises, optimized the division of labor, and improved efficiency. The digital economy has brought a powerful network effect to the Internet. The value of the network is proportional to the square of the number of nodes. This allows Internet platform-based enterprises to obtain economies of scale far superior to traditional enterprises.
At this time, Chinese Internet companies began to surpass European and American companies in scale by relying on the huge domestic demographic dividend advantage and relatively good digital infrastructure. BAT (Baidu, Alibaba, Tencent), followed by JD.com, Meituan, and ByteDance have become leaders in the Internet industry and have surpassed foreign companies of the same type in some areas.
An enterprise is a complex and evolving life system, and enterprise managers need to have the ability to think systematically. The article explores the sustainable competitive advantage and long-term growth path of enterprises from the level of system operation mechanism, and expounds the inner power of today’s “organizational vitality”. Facing the challenges brought by the characteristics of VUCA in the digital age, analysis of the internal motivation of agile organization vitality needs to adopt a multi-dimensional perspective, break through the original single scale, speed or performance standards, and focus on the organic coordination and integration of corporate strategy, organization, and talents in order to build distinctions Unique competitive advantage under the traditional economic paradigm. ——Jiao Hao, Distinguished Professor of Beijing Normal University, School of Economics and Business Administration
Under the network effect, Internet companies have a significant winner-take-all effect, and the size of the network giants is expanding exponentially. The enterprise’s cult of scale has reached its climax.
However, the huge scale does not mean that the company has strong vitality.
Among the 20 most profitable listed companies in the United States selected by Fortune in 1980, only one company, ExxonMobil after the merger, remains on its 2020 list. According to statistics by Jeffrey West, the author of the book “Scale,” the half-life of listed companies in the United States is 10.5 years, which means that approximately 50% of listed companies in the United States will disappear within 10.5 years.
For Chinese companies, scale is also not a moat. Among China’s A-share listed companies, the 100 companies with the highest market capitalization in 2010 will still be in the top 100 by 2020, with 69 companies and 31 new companies entering the top 100 list. In just 10 years, the turnover rate of the top 100 A-share listed companies has reached 31%. Among them, there is even Suning Tesco, a once prominent company, but now it is facing a bankruptcy crisis. Even the BAT Big Three, which were considered unsurpassed in the early days, are now in very different positions. Companies such as Meituan, Pinduoduo, ByteDance, etc. are also constantly attacking and cannibalizing the BAT market.
After realizing the shortcomings of scale, the corporate world began to pursue the speed of corporate growth. In 2013, venture capital expert Irene Lee defined technology startups that have been established less than 10 years and have a valuation of more than US$1 billion and are not listed on the stock market as “unicorn” companies.
The popularity of “unicorn” companies is related to the concept of “tuyere” (“tuyere” generally refers to new technologies). In fact, in the early days of the “outreach” theory, that is, around 2015, a number of fast-growing companies did appear. However, the good times did not last long. Before the outbreak of the new crown pneumonia in 2019, there were a large number of “unicorn” companies facing business crisis, including ofo, eggshell apartment, panda live and other well-known companies.
One of the important reasons for the failure of companies chasing the “outlet” is that they fail to effectively distinguish whether the “outlet” is a sudden technological innovation that creates new products or services, or just a gradual technological improvement that brings efficiency improvements. If it is only efficiency improvement, then the “outlet” will not create a new market. The company is still fighting in the stock market. The efficiency improvement brought by technology may not be able to surpass the efficiency improvement brought about by management improvement. This is usually a pursuit. The reason for the failure of the company.
Too large enterprise scale or too fast growth rate may also lead to negative externalities, causing enterprise development to be mismatched with the external environment, thereby affecting the development of the enterprise. For example, the excessive development of real estate companies has led to an excessively rapid increase in housing prices; the disorderly expansion of Internet companies has led to excessive market monopoly, resulting in the loss of social welfare. This negative externality may bring about strict supervision of the industry by regulatory agencies, restricting the development of the industry.
-02-A strategy that ignores the business cycle is an ineffective strategy
The money supply and technological impact of the Business Cycle (Business Cycle, usually translated as the economic cycle in China) are important factors that cause the decline of large enterprises and the rise of emerging enterprises.
It is generally believed that there is a long cycle of about 50 to 60 years in economic operation, which is usually called the Kangbo cycle. The business cycle is accompanied by the impact of new technologies. As shown in Figure 1, the recovery phase of each business cycle is accompanied by the emergence of new technologies, and the scope of the diffusion of new technologies highly coincides with the boom phase of the business cycle.
The reason why consumers buy goods or services is because they bring satisfaction to consumers. We call this satisfaction utility. With a given income, consumers will maintain their utility through different product combinations. When new technologies are continuously applied in business, new products and services are constantly being created, and they bring more pleasant experiences to consumers. In order to keep the utility constant, a rational consumer would choose to purchase a new commodity B with a larger quantity, making it move from point a to point b on the indifference curve (Figure 2-A). When the demands of all consumers are added up, the social demand curve of commodity A will shift to the left to DA, and the total social demand will decrease; while the demand curve of commodity B will shift to the right to DB, the total social demand will increase, and new production will be produced. Product companies can sell more products at higher prices (Figure 2-B).
At the same time, the adjustment of the business cycle from the depression stage to the recovery stage is often accompanied by expansionary monetary policies, and the investor confidence multiplier effect will allow more new funds to flow to emerging companies with better future development expectations. Therefore, under the superimposed influence of changes in money supply and demand preferences in the business cycle, as well as technological innovation, emerging businesses are more likely to stand out during the economic recovery period. For example, with the explosion of the information technology industry in the 1980s and 1990s, companies represented by Microsoft and IBM broke through the monopoly of energy and manufacturing, and jumped to the forefront of the Fortune 500’s most profitable companies.
The superposition of business cycle and technological innovation is a great test for corporate strategy. Companies that lack strategic vision are often overturned by technological innovators. For example, Microsoft once missed the development opportunity of the Internet, causing its market value to linger for a long time.
In the face of new technological changes, companies are often required to adopt more diversified strategies to meet the needs of the times. However, diversification strategies tend to disperse the resources of the enterprise, expand the complexity of the organization, and reduce the density of talents. If a company lacks organizational capabilities, diversification can easily lead the company to failure.
Facing the rapidly changing external environment, Chinese companies have explored a series of effective response methods. For example, Tencent adopts an internal horse racing mechanism. In the face of emerging technologies and markets, Tencent will not easily formulate strategies. Instead, it will use two or more business units to operate independently, and use a fully competitive and trial-and-error method to select the most vitality. s project. WeChat was born under this background.
However, we should also note that China has not experienced a complete business cycle in the more than 40 years of reform and opening up. Facing the future, Chinese companies must fully consider the impact of the business cycle in their strategies, be fully prepared for technological and market changes, and be able to adjust their organizational structure in a timely and effective manner, and maintain a reasonable echelon of talents to cope with the impact of the business cycle.
-03-Organization: the guarantee and bottom line of corporate vitality
Today, the external environment faced by enterprises is greater than in the past, with greater uncertainty, faster variability, and frequent occurrences of gray rhino and black swan incidents. Facing the strategic dilemma, we observed two completely different performances of organizational vitality. The first type of organizational structure is rigid, and it is difficult to adjust the direction of the enterprise in a timely manner in the face of changes in the external environment, causing the enterprise to fall into a crisis. The other type of organization has an efficient corporate governance mechanism, the decision-makers of the enterprise can quickly adjust the strategic direction, and the various departments of the enterprise can efficiently implement the strategic intentions of the decision-makers, and provide effective feedback to help the decision-makers of the enterprise quickly iteratively modify the strategic direction. Let the development of the organization form a virtuous circle.
The organization becomes the guarantee and bottom line of the vitality of the enterprise. A vital organization, even if the company makes strategic mistakes, it also preserves the hope of recovery for the company. For example, during Ballmer’s time, Microsoft turned a blind eye to the fast-rising Internet industry and still adhered to the PC-based strategy, focusing the company’s strategy on the Windows operating system. This strategic mistake made Microsoft lagging behind the industry for a time, and was suppressed by technology companies such as Apple and Google for a long time. From 2008 to 2013, the company’s average annual compound growth rate of market value was only 12%. Fortunately, under Microsoft’s excellent talent selection mechanism, Nadella became the new CEO, leading Microsoft to refocus on the strategic direction and optimize the organizational structure. After taking office, Nadella established a “mobile first, cloud first” strategy for Microsoft, focusing on the development of cloud computing, artificial intelligence, IoT and other technologies. In order to cope with the implementation of the new strategy, Microsoft abolished the Windows division, which was considered unshakable, established an “experience and equipment” department and a “cloud and artificial intelligence” platform, and the company laid off 26,000 employees. Microsoft, which has refocused its new strategy, is returning to its peak in business. From 2014 to 2020, the compound annual growth rate of Microsoft’s market value reached 28%, which is doubled compared to Ballmer’s period. It will be held on October 29, 2021, local time. Surpassing Apple and returning to the world’s most valuable company with a market value of nearly US$2.5 trillion (Figure 3).
-04-What kind of organization is needed in the digital age?
In the digital age, with the application of digital technology in enterprises, organizations can share data, information, and processes through digital management platforms to achieve digital economies of scale and synergy. With the sharing of operations and management functions, companies can quickly respond to market demands by establishing small organizations at the front end of the organization, and achieve agile operations.
Huawei’s organizational structure is a model of this model. In 2013, Huawei launched a new round of future-oriented organizational restructuring. Ren Zhengfei pointed out: “The structure of the future organization must adapt to the development of the information society, and the purpose of the organization is to achieve flexible and mobile strategies and tactics…. The company’s management and control objectives must gradually shift from centralized power to let people who can hear the gun call for gunfire. , Let the front organization have the responsibility and power; the rear organization empowers and supervise. This kind of organization model must be established on an effective management platform, including process, data, information, power…”
The new organizational structure has entered a period of stability in 2019 (Figure 4). In the new organizational structure, Huawei’s organizational management has two significant innovations. The first is the rotating CEO system of the management. Huawei’s rotating CEO consists of a small team, and each rotating CEO will step down after a six-month term. After leaving office, they do not leave the core management, but participate in collective decision-making to prepare for the next rotation. Under the rotating CEO system, major company decisions are made collectively, avoiding decision-making risks caused by individual ability deviations. The second is the establishment of four business groups (Business Groups, referred to as BGs). Each BG is an end-to-end operation responsibility center for customers, providing professional customized comprehensive solutions according to the business laws and operating characteristics of different customer groups. With the help of information systems and flexible management methods, each BG can effectively obtain the powerful human resources, operations, supply chain, legal and other middle-stage services provided by the group, which not only realizes agile business, but also realizes economies of scale. The new organizational structure effectively supports Huawei’s development. Even in the face of many challenges such as the US chip blockade and the new crown pneumonia epidemic, Huawei still achieved 19% and 4% revenue growth in 2019 and 2020.
Among the elements that determine the vitality of the organization, the strategy determines the direction of the organization’s development, and the organization carries the landing and execution of the strategy. The organizational structure that is compatible with the strategy is an indispensable implementation guarantee for the vitality of the organization.
-05-From talent to “personnel”, the power of organizational values
In most economic growth models, it is often believed that capital and labor are the driving forces of economic development. However, after the Second World War, Germany and Japan, which were relatively scarce in capital and labor, unexpectedly achieved rapid economic development. Economists began to study new economic growth drivers. One of the more breakthroughs was the human capital theory proposed by Theodore W. Schultz, the Nobel laureate in economics, which pointed to the new economic era. , Human capital has the characteristics of increasing marginal returns.
In the organization, Schultz’s human capital theory is also applicable, especially in the current digital economy era. The knowledge, skills, and experience of senior talents can be amplified and reused through the form of organization, and the input of knowledge has increasing marginal benefits. The characteristic of this can break the dilemma of diminishing marginal returns of capital investment.
Jim Collins pointed out in the book Evergreen that forward-looking companies have a good system to select outstanding talents and arrange them in a reasonable position. Whether an organization has a reasonable talent reserve and echelon building is the key to whether an organization can win future competition.
As a leader in the domestic information industry, Huawei is very forward-looking in talent development. In terms of management talents, Huawei’s executives are basically trained internally, and the rotating CEO system also ensures that the executive team has a good reserve. In terms of technical personnel, as early as 1999, Huawei established an algorithm research institute in Russia. Huawei’s Russian mathematicians have brought revolutionary breakthroughs on the 2G and 3G algorithm levels. After gaining the advantage of the algorithm, the competitiveness of Huawei’s products has been greatly improved. As of 2021, Huawei has more than 700 mathematicians, including the famous French mathematician Fields Medal winner Laurent Laforge.
Nowadays, the management training system has become the standard work for enterprises to train the next generation of talents. Huawei goes a step further. Ren Zhengfei launched the “Genius Youth” program in 2019, recruiting 20-30 “genius teenagers” from all over the world, using “top challenges” and top salaries to attract top talents to “win Future technology and business wars”.
Huawei’s investment in talents has brought the company a leading technological advantage. As of the end of 2020, Huawei has a total of more than 40,000 valid authorized patent families (more than 100,000) worldwide, of which more than 90% of the patents are invention patents. Ranked first among private enterprises in China.
However, it should be noted that if you have top talents, the organization is full of conflicts and confrontations, which will still weaken the vitality of the organization. For example, the resignation of SMIC executives once caused the company to suspend trading. The chairman of Kweichow Moutai’s external selection method has also affected the company’s organization and strategy consistency, resulting in fluctuations in its stock price, and also affected its organizational vitality index.
Therefore, from having a single “talent” to forming a cohesive force and becoming a “talent”, an organization requires deep-seated beliefs and pursuits. A clear mission, vision, and values are the true core competitiveness of a successful company and constitute a unique resource and competitive advantage that differentiates it from its rivals.
-06-Organizational vitality needs a multi-dimensional assessment perspective
In summary, strategy, organization, and talent constitute the three pillars of organizational vitality (Figure 5): strategy guides the right direction of the enterprise; organization connects strategy and talents, empowers and gathers “talents” through mechanisms, and enhances enterprise input and production Effectiveness; talents are the foundation of an enterprise, and the implementation of corporate strategies requires strong guarantees of talents.
How to effectively evaluate organizational vitality, we decompose the organizational vitality model into 24 indicators in three dimensions: strategic performance and risk, organizational vitality and efficiency, talent development and echelon building. In the strategic dimension, we mainly evaluate the company’s strategic performance and risks. The company’s market value and Tobin’s Q ratio are the reflection of the capital market’s effectiveness and value of the company’s strategy. The stability of the company’s senior management team reflects the company’s risks caused by the turbulence of the company’s senior management team. In the dimensions of organizational vitality and efficiency, we focus on indicators such as organizational effectiveness, digital capabilities, and organizational structure adjustments. At present, digital transformation has become a necessary option for organizations. The senior management team’s awareness of digitalization is directly related to the effectiveness of organizational transformation. Therefore, we pay special attention to the digital density of the senior management team. In the dimensions of talent construction and echelon construction, we examine the company’s incentives for talents, talent echelon construction and other indicators to assess the development potential of the company.