My article “How Networks Of Competence Are Crushing Hierarchies Of Authority” sparked lively conversations. Some readers were surprised at the headline. They should not have been.
It is hardly surprising that, in a knowledge economy, decisions based on competence outperform decisions based on positional title. Nor should it have been surprising to discover that digital technology enables networks to make quicker decisions by providing direct access to those with relevant expertise than hierarchies of authority requiring approvals up and down a multi-layered chain of command.
How Probabilities Have Become The Reality
The article shows how those probabilities have become reality.
1. The article follows Peter Drucker’s advice to “look out the window and note what’s visible but not yet seen.”
2. The article not only provides examples of networks of competence and hierarchies of authority. It offers long-term financial and staff engagement data on more than 60 public companies, including the largest and fastest growing firms in 4 continents, as shown in Figure 2. The article depicts the current management reality of 2024, not a fictional model of some preferred future.
3. The article notes that firms run principally as networks of competence embody different mindsets and culture from firms run principally as hierarchies of authority.
a. The focus of firms run principally as networks of competence is on increasing the value they offer to stakeholders; particularly customers, while not forgetting investors who put their capital at risk, suppliers providing critical parts and services, and the people adding the value within the firm itself – all are essential. By contrast, hierarchies of authority tend to have traditional goals related to making profits and maximizing value for shareholders, including the firm’s executives.
b. Firms run principally as networks of competence tend to prioritize the autonomy of those doing the work, while firms run principally as hierarchies of authority tend to prioritize centralized control and relationships with financial intermediaries, such as fund-managers.
c. Firms run principally as ‘networks of competence’ do not need bureaucracies to support the centralized decision-making and control often found in hierarchies of authority. This lack of bureaucracy reduces cost and improves the ability to rapidly adapt to meet the needs of customers.
d. Unlike the traditional image of networks as intrinsically chaotic and requiring the strong hand of hierarchy to establish order, the article reports that successful networks of competence achieve order as well as high staff engagement and organizational performance, because they are supported by flexible processes aligned with delivering value to customers. Information about articles that explain how these processes are different from those in hierarchies of authority are shown below in Figure 1.
4. The article not only names high-performing firms. It also identifies companies that are often cited as management models, even though they are consistently performing below average.
5. Unlike much management writing, which tends to seize on one problematic aspect of organizational performance, for which superficial fixes are offered as patches to solve the immediate problem, the article analyzes the overall performance of firms as multi-dimensional complex adaptive systems.
The article elicited many questions. Here are some answers.
“Don’t We Need Both Hierarchies And Networks?”
Several commentators argue that hierarchies and networks are complementary, not alternatives: in effect that we need them both. It’s true that no firm is purely a hierarchy or purely a network. All firms are a mix. But today, at the organizational level, most firms—perhaps 80% or more—are predominantly hierarchies of authority while perhaps 20% are networks of competence. Working in one rather than the other feels very different. There are also huge differences in terms of value creation, financial performance, and stakeholder engagement,
Within a network of competence, one may also find “hierarchies of competence.” Thus, when a network discovers a problem, it is common for the person with the most competence to instigate the formation of a temporary “hierarchy of competence,” When the problem is solved, the hierarchy of competence dissolves, unless the problem is a recurring one.
“Can’t Hierarchies Deploy Networks When Needed?”
On occasions, hierarchies of authority have set up networks of competence to solve solve a particular problem. A famous example is the group that IBM set up for the creation of its PC In 1980, IBM, recognizing that it had fallen behind in the growing PC market, assigned Philip Don Estridge to take on the challenge in a group far from IBM headquarters at Boca Raton. Estridge’s group became a network of competence, initially with several hundred people. It was a brilliant success and IBM took over the PC market. But after Estridge was tragically killed in a plane crash in 1985, the group was steadily folded back into the IBM hierarchy, and the PC group steadily declined in performance until it was sold off in 2004 to Lenovo. Thus, the network of competence was treated by IBM as a regrettable one-time exception, not a model.
“Can’t Firms Toggle Between Hierarchies and Networks?”
Firms that have been predominantly hierarchies of authority for decades or even centuries, have deeply entrenched attitudes, habits, and mindsets that drive behavior, regardless of its leaders prescribe. Such behaviors cannot change easily or quickly. Toggling between the two at the organizational level is unrealistic.
However, within a “network of competence,” hierarchies of competence may emerge and dissolve, as problems arise and are solved.
“Can Networks Really Outperform Hierarchies?”
Throughout history, hierarchies have been the standard way of establishing order. Person-to-person networks were unreliable and slow. Then the internet changed everything. The internet gave first, to firms, new possibilities for innovation, and then to customers, more choices, and finally to firms again, the potential of new business models that built on network effects. Within organizations, decision-making could be located in groups with the best expertise to solve those problems. Today, the fastest growing firms tend to be networks of competence as shown in Figure 2 below.
“Isn’t This Just About Technology Firms?”
No. Networks of competence are emerging in multiple sectors, including technology (AAPL, MSFT), communications (META), retail (AMZN, WMT) manufacturing, (NVDA, TSLA. BYD), pharmaceuticals (LLY, NVS), entertainment (SPOT) cosmetics (ELF). private equity (KKR, EQBBF) and encyclopedias (Wikipedia).
“I Wish This Were True!”
Some commentators say they wished the article was true. But in their world, they see nothing but hierarchies of authority, They are right that for most firms—perhaps 80%—little has changed. The fact that most conferences and management journals talk mainly about the problems generated by hierarchies of authority helps continue the impression that networks of competence don’t exist. The absence of financial data in management writing continues the illusion.
For Once, The Good News Is (Mostly) True
Though all networks of competence have flaws, they tend to grow faster than average, as both customers and investors are thrilled and those doing the work have the autonomy to contribute their talents and creativity. An organizational life-form appears to emerging that is very different from the grim realities of the steep hierarchies of authority of the 20th century. It turns out that high performance can be compatible with workplaces that are inspiring and fun in creating products and services that are both useful and beautiful. For once, the good news is (mostly) true.
And read also:
How Networks Of Competence Are Crushing Hierarchies Of Authority
Why Strategy Now Means Working Backwards From The Future