Why management models are crucial to

the success of business models

Stephen Denning

lthough executives seeking growth opportunities usually consider adopting a new Stephen Denning (steve@

A business model as the most difficult innovation initiative, the more important
challenge in business today is understanding and embracing a new management
stevedenning.com) is the
author of The Leader’s
Guide to Radical
model. Management models are critical to innovation and sustainability because they
Management
determine which business models can be successfully implemented. Successful 21st (Jossey-Bass, 2010) and The
century management models are very different from those that succeeded in the 20th Age of Agile (HarperCollins,
century. 2018). He is a senior
contributor at Forbes.com:
Business models http://blogs.forbes.com/
stevedenning/,[1] a founder
A business model determines how an organization creates, delivers and captures value
of the SD Learning
from a particular business situation. A firm can have multiple different business models for Consortium[2] and a
different parts of its business. The business model canvas (BMC) is a popular tool for Strategy & Leadership
describing a business model. The BMC may be a useful way of analyzing a particular contributing editor.
business opportunity. But it is less useful as a tool for enabling firms to address the
challenges of innovation in the digital age of fundamental, disruptive change.[3]
A management model, by contrast, is a complex set of assumptions and implicit
understandings about the firm’s structure, practices and goals within which business
models may emerge. In established organizations, these assumptions and understandings
are often embedded in the culture of the organization and are rarely discussed or written
down. They can sometimes be deduced from written processes, strategies, manuals and
the habits of the people in the organization. They are often seen as self-evident because
they reflect “the way things are done around here.”
Newcomers to an organization learn the prevailing management model by observing how
insiders act and by receiving feedback from the varying degrees of tolerance or reproof that
occurs if their behavior strays from the existing norm. The management model incorporates
the key “written and unwritten rules” of the firm. Compliance with the management model
can thus become a condition of acceptance as a member of that organization. The
management model of an organization determines what kind of business models can be
pursued within that organization and which ones are “beyond the pale.”

The 20th century management model

The management model of most long-established large organizations operating today have
common features that, taken together, can be called 20th century management. Although
there are many variants and exceptions, by and large there is a recurring pattern. The firm
has a goal of enhancing short-term shareholder value, which is achieved by focusing on
efficiency and minimizing risk. It has a structure of work that is bureaucratic with roles and

DOI 10.1108/SL-02-2021-0011 VOL. 49 NO. 2 2021, pp. 9-13, © Emerald Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 9
 rules and a vertical hierarchy of authority. Its strategy looks backward and typically ends up
doing “a variant of the same.” Leadership tends to rely on carrots and sticks. Innovation is
likely to be incremental. HR typically focuses on control. Sales and marketing aim at selling
as much as possible of the existing product. Budgets tend to be battles for resources
among the organizational silos. Finance focuses on efficiency and the short-term share
price.
There are of course many variants and exceptions, but bureaucratic management is still a
commonly recurring pattern. It was highly successful in the relatively stable world of the
20th century. It is also coherent and internally consistent.
At full development, firms run in this fashion operate “like a giant heavy flywheel pushing in
one direction with unstoppable momentum,” as Jim Collins wrote in From Good to Great
(2001).[4] This is the problem. When the marketplace changed in the 21st century and the
customers had other options, these giant unstoppable flywheels often couldn’t change
course, even when they were going the wrong way. They were unable to adapt to the
turbulent world of the digital age.

21st century leadership and management

As a result, the winners in the emerging digital economy tend to have a different set of
management assumptions – in effect, a different management model. Winners, including
firms such as Amazon, Apple, Facebook, Google, Haier, Microsoft, Netflix, Spotify and
Zoom demonstrate many management variants and exceptions, but there is a recurring
pattern – the 21st century leadership and management model. The tendency for this pattern
to emerge in the digital winners is striking. Its best practices are analyzed in recent books
by innovative insiders such as Vivek Wadhwa and his co-authors (see “An insightful new
book: From Incremental to Exponential Innovation”).[5]
In the 21st century management model, the firm’s goal is to create customers. The
structure of work focuses on enabling talent, typically with small self-organizing teams,
not bureaucracy. It has a dynamic of a horizontal network of competence, rather than a
vertical hierarchy of authority. Leadership tends to be inspirational, rather than authority-
based. Strategy works backward from customer needs. Innovation is both incremental
and transformational. HR turns into talent enablement, rather than control. Sales and
marketing aim at meeting the needs of customers and users, not just selling as much as
possible of the existing product. Budgets reflect decisions already taken in strategy.
Finance focuses on assuring long-term shareholder value. The model is coherent and
internally consistent.
The model, in many variations, is highly successful in the turbulent marketplace of the 21st
century. It is becoming more common precisely because it is a logical response to the
competitive challenges of the digital age.
In the digital era, an obsession with delivering value to customers is proving to be the key
driving force behind the success of firms like Amazon, Apple, Google, Facebook, Microsoft,
Spotify, Tesla and Zoom. These firms are showering benefits on customers and users and

“A management model is a complex set of assumptions and

implicit understandings about the firm’s structure, practices
and goals within which business models may emerge.”

PAGE 10 j STRATEGY & LEADERSHIP j VOL. 49 NO. 2 2021

have already transformed how we work, play, shop, access knowledge, learn, entertain
ourselves, communicate, move about and stay healthy. The winning firms have become
extraordinarily well rewarded as a result.
Spurred by the success of these winners, other firms are pouring money into the new
technology with digital initiatives and Agile transformations. Armies of consultants have
trained large numbers of staff on the new digital management practices. Yet without
addressing needed changes in the 20th century management mindsets, organizational
hierarchies and practices designed to maximize shareholder value, those initiatives and
attempted transformations are unlikely to generate much benefit. Success in the digital
age requires a 21st century mindset based on an obsession with delivering value to
customers.

Exhibit 1 20th century vs. 21st century management

20th Century Management 21st Century Management

A. PRINCIPLES: What is driving actual behavior in the organization
1. Goal Making money for the firm and Obsession with creating more value for
its shareholders customers; profits are results, not the goal
2. Structure of Individuals report to bosses, fill Drawing on talents of staff, with small self-
work roles organizing teams
3. Dynamic Vertical hierarchy of authority Horizontal network of competence: ideas
can come from anywhere
Key indicator Delivering short-term profits Delivering instant, intimate, frictionless,
incremental value for customers at scale
B. PROCESSES that support the above principles
4. Leadership Leadership from the top; Leadership occurs at every level;
transactional inspirational
5. Strategy Static, backward looking, Dynamic, interactive, value-creating
defensive, building moats strategies; ecosystems
6. Innovation Protecting the existing business Enhancing existing business and creating
new businesses
7. Sales & Induce customers to buy the Make a difference for the customer
marketing firm’s current products
8. People HR controls workers as the Attracting and enabling talent to add value
management firm’s disposable resources to customers
9. Operations Making output targets Making and exceeding expected
outcomes
10. Measurement External measures not decided External measures of success decided
in advance before the activity starts
11. Budget Typically, a major battle among Budget mainly reflects and enhances
silos for resources decisions taken in strategy
12. Risk Risk management viewed as Risk managed as opportunity
management neutralizing threats
13. Financial Short-term stock price Strong long-term growth and profits
results
14. Compensation Top takes the lion’s share All staff paid for the value they create and
of any productivity gains productivity gains
C. PRACTICES that support the above principles and processes
15. Integrity Individuals say & act a role Individuals say and act according to what
they believe
16. Collaboration As required Pervasive as the normal way of working
through the organization
17. Respect As necessary Pervasive and also multidirectional at all
times
18. Diversity As necessary Viewed as highly important and aiding
productivity
19. Decision- Defensive; personal Bias for action, aligned with the firm’s goal
making risk-reduction
20. Engagement Work for the money Staff are energized and Inspired by the
work itself
© Copyright Stephen Denning 2021 All rights reserved

VOL. 49 NO. 2 2021 j STRATEGY & LEADERSHIP j PAGE 11

 Organizational culture
Organizational culture concerns a vast array of issues. The management model describes
the elements of the culture that are crucial to the performance of the firm.
Because the management model is typically not described in a comprehensive
document, it can be hard to analyze or discuss. Attempts to identify the significant
cultural elements of the management model often can be seen as threatening to the
unspoken values of everyone who works in the organization. Because it is easier to
consider elements of the culture that are written down and accepted, many
organizational discussions dwell on those elements, and never get to the most
important issues determining performance, particularly when the management model
has gotten out of sync with the firm’s context.
To help firms re-sync with their evolving environment, many management thinkers are
pursuing and promoting reforms to parts of the 21st century management model. These
include branded elements like Gary Hamel’s “humanocracy” or W. Chan Kim and Renee
Mauborgne’s “blue ocean strategy."[6] These efforts are worthwhile as far as they go. But
for management to advance as a professional discipline, it needs to get beyond these
partial solutions, and view the evolution of management from 20th century to 21st century
leadership and management as a whole, as shown in Exhibit 1.

An insightful new book: “From Incremental to Exponential Innovation”

Many senior executives are frustrated by the slow pace and limited return on
investment of their digital initiatives and agile transformations and are unsure of what is
holding them back. A powerful answer – and a guide to the future – can be found in the
new book, From Incremental to Exponential Innovation: How Large Companies Can
See the Future and Rethink Innovation (Berrett Kohler, 2020), co-authored by Vivek
Wadhwa, Ismail Amla and Alex Salkever. The authors have impressive experience in
advancing technologies such as artificial intelligence, computing, digital medicine,
robots, sensors, synthetic biology and quantum computing.

They speak with authority both to fast-growing software startups as well as legacy giants in
a wide variety of sectors including software, energy, retail, finance and government. They
have been involved in creating market opportunities by taking risks on innovations and
novel business models and in fighting off insurgencies by disruptive competitors. They can
make a legitimate claim to understanding what works in practice and what doesn’t.
For example, they explain why platform businesses have emerged as the most
powerful forces in global commerce. They “allow others to build businesses on top of
them. By creating a new source of value with innovative products and capabilities,
platforms allow many others to benefit, increasing every vendor’s profit.”

They explore the differences between transaction platforms, innovation platforms and
combined platforms. “Platform businesses enjoy network effects, meaning that every
additional user of a platform makes the platform more interesting to sellers and more
valuable to both [. . .]. Large platform businesses commonly attract customers by
giving away a significant subset of some service, either by monetizing the service
indirectly with ads or by selling user data.”

“A chasm separates companies such as SpaceX from Boeing, Airbus, and Lockheed
Martin,” the authors say. “And it is unclear whether companies such as Boeing even
understand that they have to innovate more rapidly in order to survive. Something has
prevented these companies from unleashing their mighty potential to transform their
business quickly, to respond to new threats and to adopt the tactics and ideas of fast-
growing. younger companies. The obstacles are hiding in plain sight, and they all share

PAGE 12 j STRATEGY & LEADERSHIP j VOL. 49 NO. 2 2021

 the same mindset: a mindset of ‘No’ as opposed to ‘Grow!’ All too often, employees in the
legacy companies struggle to embrace the new – and so helplessly look on as upstarts
blaze new paths that capture their markets by offering greater value.”

The implications for traditionally managed firms are stark. “The information now available
has shifted power from seller to buyer; intellectual capital and brand no longer lock in the
customer. You either build loyalty via value and innovation – or perish.”

Notes
1. This article draws on insights from the author’s blog: http://blogs.forbes.com/stevedenning/,
particularlyhttps://www.forbes.com/sites/stevedenning/2021/01/03/a-powerful-diagnostic-tool-
for-agile-enterprises/ and the author’s books, The Leader’s Guide To Radical Management
(2010) and The Age of Agile (HarperCollins, 2018).
2. SD Learning Consortium: www.sdlearningconsortium.org/
3. https://en.wikipedia.org/wiki/Business_Model_Canvas
4. Jim Collins, From Good to Great (2001).
5. Vivek Wadhwa, Ismail Amla and Alex Salkever, From Incremental To Exponential: How Large
Companies Can See the Future and Rethink Innovation, (Berrett-Koehler, 2020).
6. Gary Hamel and Michele Zanini, Humanocracy: Creating Organizations as Amazing as the People
Inside Them, (Harvard Business Review Press 2020). W. Chan Kim and Renee Mauborgne, Blue
Ocean Strategy: How to Create Uncontested Market Space and Make Competition
Irrelevant (Harvard Business Review Press, 2005).

Corresponding author
Steohen Denning can be contacted at:steve@stevedenning.com

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