I’m looking at my own bookshelf. It’s not huge. I’m not one of those professors whose office is encased floor-to-ceiling with books. By the way, I think academics do this to intimidate their visitors. The message: See all these books? I’ve read every last one and that makes me so much smarter than you. Nonsense! Eggheads don’t have time to read a lot of books, either. I doubt I’ve read more than 10% of the 500+ books in my office. I get sent a lot of books, and every few months I clear out all the books I know I’m never going to read and donate them to the local library—I’m sure there’s someone out there who is dying to read “The Five Dysfunctions of a Team.”

Not that my temporary vow of book-writing abstinence is likely to rob you of any incisive insights. Truth is, the average business book is just a Harvard Business Review article with extra examples, and the average HBR article is a good PowerPoint presentation with extra prose. So I figured I could cut to the chase and just give you the CliffsNotes version of my never-to-be-published book.

There’s probably no organizational attribute that’s more important today than adaptability. In our topsy turvy world, every organization is teetering on the brink of irrelevance, and unless it can change as fast as change itself, it will soon tumble off the ledge.

In contrast to market share or product differentiation, adaptability is an abstract concept. So let me take a moment to explain why it matters. What, exactly, would be the pay-off if your organization was a lot more nimble than it is right now?

First, it would be less likely to experience a prolonged earnings slump, of the sort that could knock 50% or 75% off its share price. A dramatic slide in a company’s market value is typically the product of a failure to adapt to the inevitable maturation of a once vital business model or preempt a new and unorthodox competitor. An adaptable company rethinks its strategy without having to walk through the valley-of-the-shadow-of-death; it reinvents itself before getting mugged by the future. As a result, it experiences fewer financial reversals. Investors like companies that deliver stable earnings and penalize those that don’t—reason enough to care about adaptability, but there’s more.

An adaptable company is one that captures more than its fair share of new opportunities. It’s always redefining its “core business” in ways that open up new avenues for growth. If it had been more adaptable, Best Buy might have seen the opportunity for mail order DVDs and beat Netflix to the punch, Coca-Cola might have grabbed the lead in the sports drink business from Gatorade, and General Motors, rather than Toyota, might have the world’s best selling hybrids. An adaptable company is always reinventing itself, always pioneering new markets. This malleability gives it a P/E premium relative to its less dexterous peers.

An enterprise that is constantly exploring new horizons is likely to have a competitive advantage in attracting and retaining talent. When a once successful company runs aground and starts to list, its most talented employees usually don’t stick around to bail water, they jump ship. A dynamic company will have employees who are more engaged, more excited to show up to work every day, and thus more productive.

And finally, an adaptable company will be proactive in responding to emerging customer needs and will take the lead in redefining customer expectations in positive ways (think of Apple’s pioneering retail stores or its top-rated technical support). The result: higher levels of customer loyalty and better margins.

Adaptability didn’t rate very highly as a design criteria when those early pioneers set out to invent Management 1.0 a hundred years ago. But it’s essential now, and if I was going to write a book on how to build a highly adaptable company (which I’m not), this is what it would say.

Chapter 1: Anticipation.

It’s hard to out-run the future if you don’t see it coming.

A. Face up to strategy decay. Like people, strategies get old and die—and in recent years, strategy life cycles have been shrinking. Great strategies get copied (“strategic convergence”); they reach their natural limits (as markets saturate and inefficiencies become harder to find); they get supplanted by better strategies (that are more effective at delivering customer value); or they get eviscerated, when well-informed customers use their knowledge to slash away at margins. Sooner or later, every strategy dies, and the signs of advancing age are always visible—if you’re looking for them.

B. Learn from the fringe. What’s true for music, fashion and the arts is true for business as well: the future starts on the fringe (not in the mainstream). As William Gibson once said, “The future has already happened, it’s just unequally distributed.” To see it coming, managers have to pay attention to nascent technologies, unconventional competitors and un-served customer groups. A good rule of thumb: spend an hour a day, or a couple of days a month, exploring emerging trends in technology, lifestyles, regulation and venture capital funding. The future will sneak up on you unless you go out looking for it.

C. Rehearse alternate futures. It’s not enough to spot trends, you have to think through their implications and how they’ll interact—and then develop contingency plans appropriate to each scenario. The more time a company devotes to rehearsing alternate futures, the quicker it will be able to react when one particular future begins to unfold. “Hey, we’ve already seen this movie and we know what comes next, so let’s get moving.”

Chapter 2: Intellectual Flexibility.

To change an organization you must first change minds.

A. Regard every belief as a hypothesis. The biggest barriers to strategic renewal are almost always top management’s unexamined beliefs. Music can only be sold on shiny discs? Don’t bet on it. The news has to be delivered on a big piece of flimsy paper? Not necessarily. You have to load programs onto your computer before you can use them? Maybe not. In an age of unprecedented change, it’s important to regard everything you believe about your company’s business model, its competitors and its customers as mere hypotheses, forever open to disconfirmation. Every industry works the way it does until it doesn’t; and if you don’t challenge industry dogma, you can be sure that some unconventional upstart will. So now more than ever, humility is a virtue.

B. Invest in genetic diversity. What’s true in nature is true in business—a lack of diversity limits the ability of a species to adapt and change. Problem is, the gene pool at the top of many companies is a stagnant pond. The executive committee is usually comprised of long serving veterans whose experiences and attitudes are more alike than different. Homogeneity has its virtues—it facilitates communication and speeds decision-making—but it also limits a company’s ability respond to unconventional threats and opportunities.

C. Encourage debate and dialectic thinking. Diversity is of little value if senior executives value conformance and alignment above all else. One of the reasons that McKinsey & Company* has remained at the top of the consulting game for so many decades is that it encourages internal dissent. It believes that vigorous debate improves the quality of decisions. Within any organization, it’s usually the malcontents and rebels who are the first to sense the impending demise of a much-loved business model, and the first see the value in wacky, new ideas. Yet these folks are often muzzled rather than encouraged to speak up. On every important issue managers need to ask their colleagues, “Where do I have this wrong? How do you see this differently? What would you do here?” These questions, asked repeatedly and honestly, can protect a company from the arrogance and nostalgia that so often stymies renewal.

Chapter 3: Strategic Variety

To give up the bird in the hand you must first see a flock in the bush.

A. Build a portfolio of new strategic options. Without a lot of exciting new options, managers will inevitably opt for more of the same. That’s why renewal depends on a company’s ability to generate and test hundreds of new strategic options. There’s a power law here: Out of 1,000 crazy ideas, only 100 will merit serious consideration. Of those, only 10 will be worth a serious investment, and out of that modest bundle, only 1 or 2 will have the power to transform a business or spawn a new one. Google gets this. Within its core search business, the company tests more than 5,000 software changes a year, and implements around 500—this according to BusinessWeek. The fact that Google has thus far managed to maintain its overwhelming lead in online search is in large part the result of this blistering pace of innovation. In the end, the pace at which Google, or any other company, is able to adapt and evolve is a function of the number of new strategic options that it is able to generate and test.

B. Build a magnet for great ideas. In the quest to expand the option set, it’s important to cast the innovation net as broadly as possible. IBM did this in 2006 when it hosted a worldwide Innovation Jam. The online conversation was designed to help IBM identify new ways of using its resources to help address some of the world’s toughest challenges. More than 150,000 experts, vendors, employees and clients participated in two 72-hour brainstorming sessions that generated 46,000 postings. IBM distilled this torrent of ideas into ten major new growth initiatives, and set aside $100 million to pursue them. Dell* has done something similar with Ideastorm, a website, where customers post suggestions for new features, products and services. The battle for renewal is, at least in part, a battle to capture more than your fair share of the world’s great ideas.

C. Minimize the cost of experimentation. A company can’t explore a lot of new options if it costs millions of dollars (or even thousands) to test each one. Problem is, big companies aren’t very good at quick-and-dirty. Yet to outpace change, every organization is going to have to master the art of rapid prototyping. Here the goal is to maximize the ratio of learning over investment–to find the sweet spot of demand for a new product, or perfect a nascent business more rapidly and inexpensively than your competitors. Listen to Google’s CEO, Eric Schmidt, on this point: “Our goal is to have more at bats per unit of time and money than anyone else.” Your goal should be the same.

So that’s the first three chapters of my never-to-be book. In my next post, I’ll share the last three.

For now, a question: What’s the one thing your company could do to lessen the gravitational pull of the past?

*Professor Hamel has ongoing business relationships with both McKinsey & Company and Dell.

Why does  change have to happen this way?   Why does a company have to frustrate its shareholders, infuriate its  customers and squander much of its legacy before it can reinvent itself?   It’s easy to blame leaders  who’ve fallen prey to denial and nostalgia, but the problem goes deeper than  that.  Organizations by their very  nature are inertial.  Like a  fast-spinning gyroscope that can’t be easily unbalanced, successful  organizations spin around the axis of unshakeable beliefs and well-rehearsed  routines—and it typically takes a dramatic outside force to destabilize the  self-reinforcing system of policies and practices.

Let me  return, for a moment, to the topic of my last post, organized religion.   What are some of the inertial forces that have prevented churches from  reinventing themselves in ways that might make them more relevant to a  post-modern world?  A partial list  would include:

–Long-serving denominational leaders  who have little experience with non-traditional models of worship and  outreach.

–A matrix of top-down policies that  limits the scope for local experimentation.

–Training programs (seminaries) that  perpetuate a traditional view of religious observance and ministerial  roles.

–Promotion criteria for church pastors  that reward conformance to traditional practices.

–And a straightjacket of implicit  beliefs around how you “do church.”   For example:

Church  happens in church.

Preaching is the most effective way of imparting religious  wisdom.

Pastors lead in church while parishioners remain (mostly)  passive.

The  church service follows a strict template:  greet, sing, read, pray, preach,  bless, dismiss (repeat weekly).

Believers, rather than curious skeptics, are the church’s primary  constituency.

Going  to church is the primary manifestation of a spiritual life.

Church  is a lecture not a discussion.

If organized  religion has become less relevant, it’s not because churches have held fast to  their creedal beliefs—it’s because they’ve held fast to their conventional  structures, programs, roles and routines.  The problem with organized religion  isn’t religion, but organization.    In the first and second centuries, the Christian church was communal,  organic and unstructured—a lot like the Web is today.  It commanded little power (it couldn’t  raise an army or depose a monarch), but had enormous influence.  (The Christian church grew from a handful of believers in AD 40 to 31 million adherents by AD 350, roughly half the population of the Roman empire. ) Today many mainline denominations  are institutionally powerful, but spiritually moribund—at least in the  U.S.

What’s true  for churches is true for other institutions:  the older and more organized they get,  the less adaptable they become.   That’s why the most resilient things in our world—biological life,  stock markets, the Internet—are loosely organized.  

To thrive in  turbulent times, organizations must become a bit more disorganized—less buttoned down, less  uptight, less compulsive, less anal.

As a start,  you’ll need to become more alert to the things that reflexively favor the  status quo in your own organization.   While no one’s going to stand up  and say, “I’m on the side of inertia,” they may nevertheless defend management  processes that reflexively favor the status quo.

All of the  things that allow little organizations to grow into big ones—scale, learning  effects, and accumulated expertise—are products of repetition.  When the environment changes, however,  the returns to repetition start to diminish.  Problem is, old habits die hard,  particularly when they’ve been hardwired into a company’s management  processes.  

–Hiring criteria that over-value  “expertise” and under-value diverse life experiences.

–A planning process that  institutionalizes orthodox thinking by using industry standard definitions of  customer segments and product categories

–Decision-making bodies that are  comprised mostly of long-serving industry veterans who tend to discount new  views.

–Highly conservative budgeting criteria  that starve unconventional projects of resources by demanding near certain  returns, even when the funds involved are modest.

–A single approval track for new  projects, where every new idea has to go up the chain of command.

–Large, monolithic organizational units built around a single, dominant, business model.

–A highly optimized but inflexible IT  infrastructure.

Large  organizations don’t worship shareholders or customers, they worship the  past.  If it were otherwise, it  wouldn’t take a crisis to set a company on a new path.

The most  extreme version of organizational inertia comes when those within a company  are no longer able to distinguish between form and function—when their  instinctual loyalty is to the “how” rather than the “what.”

If one  didn’t know better, it would be easy to believe that a lot of newspaper  publishers have been more committed to producing broadsheets than to  delivering the news in a convenient form, or making it easy for advertisers to  connect with customers.

Until  recently, music companies seem to have been more committed to stamping out  plastic discs than to giving their customers easy access to their favorite  tunes.

Many drug  companies seem a lot more interested in peddling temporary palliatives for  chronic conditions than in eradicating disease.

For years,  Kodak seemed more focused on making film than on leveraging new digital  technologies that would make photography simpler and cheaper.

Alzheimer’s,  arteriosclerosis and arthritis—these seem to be the inevitable byproducts of  old age.  But must organizational  maturity bring a similar set of maladies?  I don’t think so.  Despite all the evidence to the  contrary, I think a company can truly be “Forever 21.”

In my next  couple of postings I’ll give you the Cliff Notes version of the book I’m too  busy to write:  ”Ever Young:  How to Keep Your Company Flexible,  Vital and Impertinent.”

Until then,  a question:  What are the most powerful inertial  forces in your organization?  And  what could be done to counter them?

So there I was, in front of 7,000 preachers and laymen, with another 60,000 or so by satellite. I’m used to flashing my PowerPoints in front people who are richer, smarter and more powerful than me. But this was the first time I had to face a stadium’s worth of folks who were probably more virtuous than me. It wasn’t so much a case of Daniel in the lion’s den as Gary in the Christians’ den. (By the way, I donated my small honorarium to charity).

Obviously, no one dragged me on stage in chains. I went for two reasons. First, I believe that religious institutions, like other sorts of organizations, need a management reboot, and I know a little bit about how to make this happen. My hypothesis: the problem with organized religion isn’t that it’s too religious, but that it’s too organized. And second, I believe that the “church” (in the broadest, ecumenical sense of the word) plays an essential role in constructing the moral foundations of a democratic society—a view advanced 147 years ago by that famous French tourist, Alexis de Tocqueville:

“Champions of freedom…should hasten to invoke the aid of religion, for they must know that without morality freedom cannot reign…”ⁱ

Let me expand for a moment on this second point.

Obviously, you don’t have to be religious to be moral, and beastly people are sometimes religious. Yet despite the claims of neo-atheists like Richard Dawkins, Christopher Hitchens and Sam Harris, religion has, on balance, curbed rather than exaggerated the human propensity for evil.ⁱⁱ Yes, terrible things have been done in God’s name, but for every tyrant and terrorist who has claimed a divine warrant, there are thousands of faithful souls whose selflessness and benevolence has helped to make the world a more just and tranquil place.

At the heart of every faith system is a bargain: on one side there is the comfort that comes from a narrative that suggests human life has cosmic significance, and on the other a duty to yield to moral commands that can, in the moment, seem rather inconvenient. I believe we should be grateful for every individual, whether deluded or not, who willingly agrees to be so constrained. For while there are some who share a two year-old’s belief that we’d all be better off in a society free of moral strictures, most of us realize we wouldn’t much like a world in which our neighbors (and our bankers) were unprincipled knaves.

Of course, in an ideal world, others would treat us charitably even when we stick it to them; we could take advantage of their goodness while not being very good ourselves. But this doesn’t scale. When that sort of one-sided selfishness becomes the norm, life gets brutish for everyone—a spiritual tragedy of the commons.

The fact is, society is made more hospitable by every individual who acts as if “do unto others” really was a rule. And contrary to what you might believe, evidence suggests that, on average, “religious people” really are nicer—in practical feed the hungry, clothe the naked, sorts of ways.ⁱⁱⁱ (And if you’re one of those generous folks, you’re undoubtedly embarrassed by the minority of believers who are quicker to judge than they are to love).

Critically, morality is only one generation deep, so unless we want our children to live in a bleak world, we must replenish the stock of spiritual capital we inherited from our parents and grandparents. In theory, at least, churches are allies in this effort.

So that’s why I went to Willow—and the experience was like a day-long group hug. Good golly, what a bunch of, well, nice folks they were. Which made it even tougher for me to deliver my kindhearted, bareknuckled rant.

Fact is, organized religion hasn’t been doing too well recently, at least not in the developed world. (And as we’ll see, what ails “the church” probably ails your organization as well.)

Here’s some of the disquieting data I shared with my ecclesiastic audience:

–Since 1990, the number of Americans who claim no religious affiliation has nearly doubled, and the number of people who describe themselves as atheist or agnostic has quadrupled—this according to the 2009 American Religious Identification Survey (as quoted in Newsweek magazine.)^iv

–The same survey reveals that two-thirds of Americans believe religion’s influence is waning in our society, and just 19 percent say it’s growing. And the proportion of Americans who think religion “can answer all or most of today’s problems” is now at an historic low of 48 percent.^v

–On an average weekend in 2005, just 17.5% of the population attended a Christian church service, down from 20.4% in 1990. And this downward trend has been accelerating. If it continues, only 1 of 7 individuals will be attending church regularly in 2020.^vi

–In 2006 there were 91 million more Americans than in 1990—and 70 million of them were under the age of 17. Yet over this time frame, church attendance stayed flat.^vii

–The Christian “brand” has also taken a beating, particularly among young people. When polled, around half say they have a neutral view of Christianity, but among those who feel more strongly, the ratio of negative to positive views of “Christianity” and of those who are “Born Again” is 2:1. And when asked about “Evangelicals,” the ratio of negative to positive jumps to 16:1.^viii

Not surprisingly, pastors often blame secular forces for these trends—the problem in their view isn’t “the church” but “the world,” or more specifically . . .

–A consumer-driven society where the size of someone’s paycheck counts for more than the quality of their character.

–The near infinite number of distractions in our media-saturated culture which crowd out time for spiritual reflection.

–The deeply cynical view that young people have of large institutions—a view that lumps big religion together with big business and big government.

–The growing and reflexive skepticism of anyone who claims to have “the truth.”

While these realities have undoubtedly played a role in the recent “de-churching” of America (and in the much-advanced secularization of Europe), I don’t believe this is the whole story, not by a long shot—and I took pains to explain why.

Yes, church attendance may be lagging, but nine out of ten Americans still claim to have faith in a spiritual being—a number hasn’t changed much over the past two decades. And only 9% describe themselves as neither religious nor spiritual. Interestingly, though, nearly a third say they are spiritual, but not religious.ix In other words, though Americans may have become less religiously observant, they haven’t become any less spiritually inclined.

Church consultants Tom and Sam Rainer define a “healthy” church as one with a “conversion ratio” of 20:1 or better; that is, it takes twenty or fewer congregants to bring in one new member during the course of a year. By that modest standard, the pair estimates that only 3.5% of America’s 400,000 churches are evangelistically fit.^x

“So,” I asked my audience, “is it the gospel that has become irrelevant or your churches? Is the problem God’s message or your methods?” (By the way, to a committed pastor, those are rhetorical questions). The data are clear: People still have spiritual needs (even narcissistic postmoderns), but the church has been growing less effective in filling those metaphysical voids.

With that point nailed down, I laid out the rest of my argument.

Organizations lose their relevance when the rate of internal change lags the pace of external change. And that’s the problem that besets many churches today.

And guess what? A lot of secular institutions are in the same boat.

Think about General Motors, Sony, Motorola, United Airlines, AOL, Yahoo, Sears, Starbucks—how have these companies been doing in recent years? Not too well. And not just because of the recession, but because they got stuck in the mud; they fell in love with status quo.

Their employees were prisoners of precedent, locked in jails run by the custodians of convention.

So as church leaders, you shouldn’t feel too sorry for yourselves. Your problem isn’t unique, and it isn’t materialism, atheism, skepticism or relativism—it’s institutional inertia. And if it makes you feel better, it’s not entirely your fault. Like leaders everywhere, you’ve been mugged by change.

After 13.4 billion years, the pace of change has gone hypercritical—at least on this planet. We didn’t ask for this, but we have to deal with it. Today we live in a world that seems to be all punctuation and no equilibrium, where the future is less and less an extrapolation of the past. And our conservative, hierarchical organizations aren’t up to the challenge—they’re simply not adaptable enough.

In this environment, you’re either going forward or backwards—but you’re never standing still—and at the moment, a lot of organizations, churches included, are going backwards.

Historically, business leaders and church leaders didn’t have to worry about fundamental paradigm shifts. They could safely assume that their basic business models would last forever.

In the case of church, this meant loyal pew-warmers who would show up every week, sit passively through the same unvarying church service, drop $20 into the plate as it passed, and politely shake the pastor’s hand as they headed off for lunch.

But business models aren’t eternal—and their mortality rate has been rising. In industry after industry we’ve witnessed profound paradigm shifts . . .

–In retailing there’s been a shift from the suburban shopping mall to hypermarkets to online retailers.

–In pharmaceuticals there’s been a shift from drug discovery to drug design based on genetic information.

–In the car industry from combustion engines to plug-in hybrids and all electric vehicles.

–In software from packaged apps you install on your computer to apps that reside in the cloud.

Of course there’ve been paradigm shifts in churches as well, with the move from small community churches to mega churches to multi-site churches, the emergent church, home churches, and whatever follows that. (Click the links for examples of each).

Most organizations, though, end up shackled to one business model—and when it atrophies, so does the institution.

The Second Law of Thermodynamics applies to organizations as well physical systems. Over time, visions become strategies, strategies get codified into policies, policies spawn practices, and practices become habits. That’s organizational entropy—and it’s why success is usually a self-correcting phenomenon.

And it’s also why the hard thing—the really hard thing, isn’t inventing a brilliant strategy, but reinventing it!

Given all of this, the most critical advantage a church (or any other organization) can build is an “evolutionary advantage”—an ability to constantly morph and adapt.

Sadly, it usually takes a crisis to set an organization on a new path.

For example . . .

–It took a $14 billion swing in earnings back in the mid-1990s to convince IBM’s leaders that the company should become less product-focused and more service-focused.

–And only a near death experiment could compel GM’s leaders to do what they should have done years ago and sell off a number of under-performing divisions.

Moreover, it’s usually necessary to decapitate the old leadership team before an organization can embark on a new course. In other words, fundamental change in large organizations happens the same way it happens in poorly governed dictatorships—belatedly, infrequently and convulsively. And that’s pathetic. It shouldn’t take the organizational equivalent of a deathbed experience to spur renewal. We need to change the way we change.

Over the centuries, religion has become institutionalized, and in the process encrusted with elaborate hierarchies, top-heavy bureaucracies, highly specialized roles and reflexive routines. (Kinda like your company, but only more so). Religion won’t regain its relevance until church leaders chip off these calcified layers, rediscover their sense of mission, and set themselves free to reinvent “church” for a new age.

Doing this is going to take a management revolution. Back in the first century, the Christian church was organic, communal and mostly free of ritual—and it needs to become so again—as does every organization, public or private, large or small.

So, how do you “decalcify” an organization? Great question, and one I dug into with all those goodhearted pastors. But this blog’s already too long, so until next time, a couple of questions:

But for now, two questions:

First, what do you think is wrong with “church?” And what would you do to change it?

And second, what are the forces of inertia that keep your company from changing as fast as it needs to?

(Footnotes:)
i Alexis de Tocqueville (trans. By Arthur Goldhammer), Tocqueville: Democracy in America, New York: Library of America, 2004, p. 12.
ii For the other side of the story, see Dinesh D’Souza, What’s So Great About Christianity?, Washington D.C.: Regnery Publishing, 2007.
iii Arthur C. Brooks, Who Really Cares, New York: Basic Books, 2006.
iv John Meacham, “The End of Christian America,” Newsweek, April 4, 2009.
v Ibid.
vi David T. Olson, The American Church in Crisis, Grand Rapids, Michigan: Zondervan, 2008, p 36.
vii Ibid., pp. 35-36.
viii David Kinnaman and Gabe Lyons, Unchristian, Grand Rapids, Michigan: Baker Books, 2009, p. 25.
ix American Religious Identification Study quoted in John Meacham, “The End of Christian America,” Newsweek, April 4, 2009.
x Thomas S. Rainer and Sam S. Rainer III, “Surprising Insights,” Outreach, January-February 2007.

In most organizations, the decision-making freedoms of frontline employees are highly circumscribed. Sales reps, call center staff, office managers, and assembly line workers are usually trussed up in tangle of top-down policies, “best practices,” and standard operating procedures. Yet it’s impossible to build a highly adaptable organization without first expanding the scope of employee freedom. To create an organization that’s adaptable and innovative, people need the freedom to challenge precedent, to “waste” time, to go outside of channels, to experiment, to take risks and to follow their passions.

Interestingly, humanity’s most adaptable social system—democracies and markets—are those that extend the greatest freedom to their constituents. In a democracy, you don’t need anyone’s permission to form a new political party, publish a politically charged article, or organize a “tea party.” And in open markets, individuals are free to buy and invest as they see fit. When compared to the typical corporate leviathan, these systems are remarkably under-managed.

In most languages, “control” is the first synonym for the word “manage.” Control is about spotting and correcting deviations from pre-defined standards; thus to control one must first constrain. Standards, policies and rules are important—no organization can exist or survive without them. The problem, though, is that managers (and public sector bureaucrats) are incentivized to enlarge, rather than reduce, the scope of their regulatory powers. More rules mean more things to control, which in turn means more job security and more power. The impetus to control works like a ratchet—as the years pass, the number of rules and regulations steadily increase. That’s why older organizations are usually more sclerotic than young ones—over time once flexible minds and muscles become slowly encased in a hard carapace of rules and regulations.

Imagine, then, the controls you might find in an organization that will soon celebrate its 150th birthday, a venerable institution like, say, the Bank of New Zealand. BNZ is the 148-year old subsidiary of National Australia Bank, but strangely enough it’s also a case study in the power empowerment. (Editor’s note: Professor Hamel is a faculty member on NAB’s senior leadership program.)

An impromptu experiment…

It started simply enough. In June, 2007, Chris Bayliss, BNZ’s General Manager for Retail Banking was visiting the bank’s City Center store in Christchurch. (Within BNZ’s retail-oriented culture, branch banks are known as “stores.”) It was just after 9 in the morning and the bank wasn’t yet open, but a long line of customers was already forming on the sidewalk. On most days, BNZ’s stores opened at 9 am, but today was Tuesday, and on Tuesdays and Wednesdays, staff training sessions kept the doors locked until 9.30—hence the queue. At BNZ, corporate policy dictated opening hours, and all of the bank’s 180 stores, from Invercargill in the south to Kaitaia in the north, adhered to the same schedule.

As the line of impatient customers continued to grow, Chris turned to Sue Eden, the store manager: “If you owned this store, would you open earlier and reschedule the training for another time?” “Of course,” answered Sue, “just look outside!” Chris frowned. Here was a store manager eager to serve her customers, yet bank policy was tripping her up. “OK then,” Chris challenged, “you choose when to open and close—but don’t expect any extra money from me staffing and training.” The store manager quickly agreed, and Chris walked out of the store scarcely aware that he had just launched a mini-revolution in employee freedom.

Within days, news of the policy break had spread across BNZ’s retail network. Soon Chris was fielding requests from managers throughout New Zealand, all of whom, it seemed, were eager for the same prerogatives that had just been granted the Christchurch store. With emails flooding in, Chris reached out to his colleague, Blair Vernon, General Manager of Marketing. Within the bank, opening hours were considered a “brand and customer experience issue,” and that was Blair’s bailiwick. As a teenager, Blair had flipped burgers at McDonald’s, a company let its franchisees decide when to open and close. Reckoning that what worked for McDonald’s would probably also work for BNZ, Blair agreed that the petitioners should be able to set their own hours.

In Takapuna, a tiny Auckland suburb, BNZ became the first bank to open on Sunday mornings. This allowed the store to serve the thousands of customers who flocked in to the local farmers’ market. In South Island ski towns, store managers opted to stay open until late in the evening, so skiers could attend to their banking needs after a full day on the slopes. Within city centers, many store managers chose to synchronize their schedules with nearby retailers, rather than to keep bankers’ hours. Within 6 months, nearly 95% of BNZ’s 180 stores had altered their opening hours in some way.

Not so fast…

While store managers were moving quickly to exploit their newfound freedom, there were many at head office who were fretting about the loss of control. Chris and Blair soon found themselves fighting a rearguard action with head office staff who regarded the policy shift as rushed if not reckless. Typically, a change of this magnitude would have go through a detailed risk assessment that gave every function the chance to weigh in. Chris and Blair struggled to defend their hurried decision. They hadn’t set out to bypass the usual decision-making process, but had simply been overwhelmed by the horde of frontline managers who were eager to follow the example of the Christchurch store.

Within the bank’s HR function, there was a concern that the New Zealand bankers union, Finsec, would raise a “ruckus” and object to any changes that extended the work day or compelled employees to come in on weekends. Others worried that store managers might choose to cut opening hours—a move that would jeopardize customer satisfaction and the brand. BNZ’s risk management experts had their own issues. There were detailed policies that governed how a store was supposed to be opened, and cash pick-ups from armored had to be scheduled at precise times. Given this, how could managers be allowed to open up “any old time they felt like it?” IT was another sticking point. The bank’s IT staff typically scheduled major maintenance work during times when the stores were closed. What would happen if a store opened at an odd hour and the IT system was down?

Then there was corporate marketing. Charged with protecting the brand, senior staffers worried that a hodge-podge of opening times might damage the bank’s carefully built reputation for consistency and reliability. And what about all those hand-lettered signs that were being used to announce new opening hours? They looked tacky.

While many of the objections were more political than practical, some were well-grounded and soon led to policy adjustments. A software template was developed that allowed store managers to print out a simple sign displaying local opening hours. Team members were reminded they still had to abide by the bank’s security policies and could do nothing that would jeopardize employee safety. Furthermore, store managers were expected to consult with team members before making any changes to staff schedules—new opening hours required the agreement of every store employee. This caveat also helped to neutralize objections from BNZ’s union. How could it demure when the new work schedules had been set by employees rather than imposed from above.

“What everyone learned,” says Blair, “is that when you treat people like adults, they act like adults.”

A day at the beach…

Though he never really feared an operational Armageddon, Chris acknowledges that the recent changes are irreversible. Says he, “The empowerment horse is really out of the stable now.” Store managers understand that the new policy was the product of an ad-lib experiment and a grass roots movement, rather than a group-level task force and carefully scripted roll-out. This fact, as well as the oft-expressed enthusiasm of Chris and Blair for a bottom-up approach to innovation, has encouraged store teams to take the initiative in testing other off-beat ideas.

One of the zaniest so far is a “trailer” bank. Explains Blair: “It’s a bank that’s kind of like an ice cream cart. It’s been shrunken so it can be pulled behind a vehicle. While the concept had been in development for several months, a local store caused a splash when they towed the trailer onto a beach on New Year’s Day. Clad in BNZ T-shirts, local staffers blew up balloons. Soon children were circling with their parents in tow. As a crowd gathered, store employees fired up a barbecue and were soon passing out sausages and chatting with potential customers about BNZ’s latest products.

While People and Culture worried that some might think the bank was exploiting its employees by making them work on New Years Day, or breaching the Health and Safety regulations by cooking sausages, Chris and Blair were more sanguine. Their view of the bank-on-the-beach: A great example of what charged-up employees can do when they have the freedom to experiment. Says Chris, “If we’d told them to do this, it never would have happened. But it was their idea, and no one even bothered to ask permission.”

Why it works…

So how has BNZ been able give employees more discretion and still run a disciplined and profitable business?

The answer starts with incentives. A typical BNZ store has four to seven team members: the store manager, a few tellers and a couple of salespeople, aka “advisors.” Each store manager receives a salary plus a bonus for meeting the store’s financial goals—usually 10% of base pay. In addition, the manager receives 10% of any profits earned in excess of the plan. Advisors receive bonuses based on the products they sell, such as credit cards and life insurance policies. Store employees also participate in a team-based incentive scheme that is linked to sales performance and customer satisfaction metrics.

In defending the move to flexible hours, Chris often argued that “there’s nothing more frustrating for staff than being open when the town is dead, or closed when it’s packed.”

The second component of BNZ’s decentralized control system is data—lots of it. Says Blair, “If you empower people but don’t give them information, they just fumble in the dark.” To address this, an initiative was launched in 2004 that gave every store employee a clear window into the financial performance of the bank. Daily P&L statements provide detailed information on costs, revenues, and profits for each store—all of it broken down by product and service.

Nothing remarkable about this, except that in most banks branch managers don’t get a real P&L. Instead they get a set of synthetic management accounts that provide only a rough indication of the store’s profitability—and they seldom get detailed information on the performance of other branches. These contrived performance measures allow head office executives to tweak incentive structures at will and exhort high performing branches to do even better.

By contrast, BNZ provides its store managers with a high definition picture of branch profitability—store managers even know the bank’s wholesale cost of funds, a number that heavily influences local P&Ls. Having been endowed with information, store managers are given lots of latitude in making business decisions—and are then held accountable for results. A store manager might, for example, choose to discount a profitable loan to win a new customer—but that loan would stay on the store’s books, contributing profits or losses, until it was paid off.

“It’s amazing,” says Blair. “If you get head office out of the way and give people accurate data about their performance, they quickly figure out that its good to be open when there’s money to be made!”

At BNZ, store employees have the incentives, the data, and the freedom that are typical of a small business owner. As a result, most regard themselves as more than mere clock-punchers; they’re folks who have a real stake in a real business—and they run it as if it was their own.

Blair summarizes the changes at BNZ with a telling anecdote. “I was walking by one of our stores on a Sunday morning with my kids, and my son said, “Dad, the doors on the bank are open.” And I thought, crap, someone forget to close the doors. But then I looked in, and saw that the entire store was open. No one is forced to roster on Sunday, but team members had come in from other branches in order to swap their hours. One mom was there working on Sunday because she wanted to take Wednesday off. And it hit me: no one at head office even knows when the stores are open.” Adds Chris, “The freedom to open when you want may not be the biggest thing we’ve done, but it’s the most symbolic in terms of telling our people, ‘we trust you, and we’re serious about empowering you.’”

OK, so none of this is rocket science, and by itself, this single policy breach is unlikely to transform the fortunes of BNZ. But the story is telling none the less. Ask yourself, how many policies in my company exist only to preserve the fiction that head office is really in control? How many enforce standardization at the expense of adaptability, and deliver few if any performance benefits?

Don’t get yourself into trouble, but here’s a question for you . . . where and how would you extend the scope of employee freedom in your company? What rule or regulation would you abolish, and why?

I’d like to acknowledge the assistance of Amy Blitz, my co-author on this post.

Yet this crude tautology conceals a more subtle point. Institutions are seldom murdered; usually, they commit suicide (with politicians sometimes cast in the role of Dr. Kevorkian). But just as a suicide can be untimely, so too can corporate death—at least from the perspective of society at large.

Time enables complexity. It took millions of years for evolution to produce the mammalian eye and, eventually, the human brain. If a meteor had destroyed life on Earth in the millennia preceding the Cambrian explosion, the possibility of human reason would have been aborted. Whether anything would have been “lost” by such a catastrophe is a metaphysical question, but the point becomes quite practical when we veer back to the world of organizations.

Organizations grow and prosper by turning simple ideas into complex systems—from the idea of mobility for the masses we got Ford Motor Company, and from the notion of Internet search, Google. Yet the process of turning inspiration into value takes time, proceeding as it does through iterative cycles of experiment-learn-select-and-codify. If a poor executive decision prematurely interrupts this process, a society may lose the benefit of the original idea, if only for the period of time in which it takes another organization to pluck the idea from the ashes of the failed pioneer.

Imagine for a moment that Larry Page and Sergey Brin, Google’s founders, had failed in their quest to wrap a revenue-producing business model around their original page-link algorithm. Sooner or later, another upstart would have come along to help us navigate the Web, but in the meantime, an important avenue of human progress would have been closed off. In general, complex things are of more value to human beings than simple things—the iPod versus a record player, for example. But complexity takes time—and that’s another reason to be less than sanguine when companies fail. Again, this isn’t an argument for insulating a company from failure; it is, however, a reason to imbue organizations with the capacity to dynamically adjust their strategies as they pursue a long-term mission. Longevity should never be a gift; it should always be earned.

A final thought. Those who regard institutional death with equanimity often view businesses as organisms. In the natural world, animals compete for food and mates, and the strong devour the weak. When a lion brings down a gazelle, there are few who mourn the loss of life (other than tender-hearted viewers of the Discovery channel). I believe it’s wrong, though, to view a substantial company, such as Citi, IBM, or Sony, as a single organism. The size and scope of organizations such as these, and the economic consequences of their success or failure, dwarfs that of a small family-run company or a sole proprietorship. Thus the biological equivalent of a large-scale corporate failure is not the death of a lone polar bear or woodpecker, but the collapse of an entire ecosystem, or the extinction of a species—events that most biologists would lament.

So, dear reader, can a company die before its time? Can you name one that has?

If you’re a venture capitalist, a classically trained economist or an emotional zombie, you’re likely to answer “no.” I get that. In a market economy there are several mechanisms that make it difficult for a company to persistently misuse society’s resources. Highly competitive product markets, a healthy entrepreneurial sector, a market for corporate control and the threat of bankruptcy — these are the things that protect customers and shareholders from unremitting managerial incompetence. When these insurance policies are in place, a corporation that fails to adapt to changing circumstances will lose its customers, its best employees, and ultimately, its independence. That’s what happened to Sun Microsystems, the once-revolutionary company that recently ceded its sovereignty to Oracle. Given this, it doesn’t matter whether an individual company is resilient, it matters only that the economy is. This view has the benefit of being neat and simple, but on several counts it’s also simple-minded.

First, many of society’s most important institutions are not publicly-listed companies: the U.S. Department of Homeland Security, Britain’s National Health Service and NATO to name a few. For the most part, these organizations have no direct competition and can’t be taken over. Within the public sector, there is little that safeguards society from management teams that are less creative and energetic than they should be. Think about the last time you paid a visit to the Department of Motor Vehicles. How would you compare that experience to ordering a book from Amazon or downloading a track from iTunes? Equally quick and painless, or more like dentistry without Novocain? Protected as they are from risk of defecting customers, hostile takeovers and bankruptcy, public sector managers face few penalties for sloth, ineptitude and apathy.

Second, the machinery that strips resources from poorly managed companies operates slowly and unreliably. Overly compliant boards often show a remarkable amount of patience with CEOs who fiddle while a business model burns, or use a penknife instead of a machete to hack away at bloated costs. Consider, for example, how long Jerry Yang was able to hold on to the top job at Yahoo, despite the company’s repeated failures to develop a potent Web 2.0 business model. Yang talked his board into rejecting Microsoft’s advances — in a deal that would have priced Yahoo at twice the company’s current market value.*

Over time, a successful company will acquire much in the way of resources and momentum, and these things often insulate it from reality once it has stopped being successful. That’s why it can take years or even decades for a listing business to right itself or go under—and all the while, it will be wasting talent and cash. In theory, companies die quickly; in practice, they don’t.

Another often ignored reality involves the adjustment costs of corporate failure. Reallocating the highly specialized skills and assets of a floundering company is a grossly inefficient process. It can take months or years for displaced employees to find new jobs—and when they do, those jobs will probably pay less than the old ones. It can take even longer to find new uses for idled facilities and equipment. A laid off autoworker is unlikely to find a high-tech job in Silicon Valley, and it’s not easy to transform an empty car plant into gentrified housing. An acquisition or bankruptcy can also destroy delicately constructed competencies, when long-standing teams get disbanded and veterans get fired. Sometimes valuable skills are lost forever—at least in that particular economy.

And then there are the negative externalities—the costs that failing companies impose on society at large in the form of unemployment benefits, reduced tax revenues, and a general loss of social wellbeing. To see these costs close up, visit the vast industrial wasteland that surrounds Detroit—the rusted, shuttered and socially benighted testament to the inability of America’s car companies to keep pace with changing times. Consumers and competitors win when corporate dinosaurs succumb to the inevitable, but it’s the taxpayers and citizens who get stuck with the costs of the funeral. Large institutions don’t die quickly and they never die cheaply.

There is a fourth and final reason to bemoan the death or incapacitation of a once-successful business. Leaving aside the promise of a hereafter, human beings have only two ways of transcending death—by passing on their genes to their children, and by building institutions that last. It is only natural that we would care about our institutions, or at least those in which we have invested our own skills and passions. We want them to adapt and we hope they’ll outlive us.

Cambridge University, Microsoft, the Presbyterian Church, Toyota: these are vessels into which tens of thousands of individuals have poured their energies and ideas; they are living monuments assembled out of human ingenuity. As such, we owe these and other similar institutions the same care and respect that we would accord the Pyramids or Salisbury Cathedral. Like curators everywhere, we have a duty to protect our inheritance from the ravages of time—not by propping up failing institutions and roping them off from reality, but by helping them to change and adapt in ways that guarantee their continued relevance.

Now, before the free-market ideologues and libertarians start hyperventilating, let me be clear: I don’t believe that managers should ever be protected from the consequences of their own stupidity. While there’s nothing inevitable about institutional death (in theory, every company could live forever), I do believe there are many organizations that deserve to die—and that policymakers should leave them to that fate. Subsidies of whatever sort are always distortive and invariably ill-conceived (usually by politically astute and economically witless legislators). Subsidies and bailouts contort economic decision-making, reward bad management decisions, lock in archaic industry structures and inhibit growth.

So yes, I believe that corporate failure is usually a bad thing; but I also believe that every organization must continually re-earn its right to exist—whether that’s the local high school, the US Army or General Motors. Longevity should be the reward for resilience, not the product of politically-mediated protection. While as a practical matter some institutions may be too big or too important to fail in the short-run, policymakers must never give any institution immunity from economic Darwinism.

Having said that, as consumers, taxpayers, investors and employees, we have an enormous interest in helping society’s most important institutions to become more adaptable. Failed schools, inefficient healthcare delivery, massive government waste, entire industries in crisis, wholesale layoffs and massive write-downs—everywhere around us we see the costs of maladaptation, the toxic fallout of organizations and political systems that have been overtaken by change. The challenges we confront in the 21st century are too complicated for any of us to solve on our own. We need institutions—but we need them to be far more flexible and resilient than they are today—and until we solve this problem, most of the other challenges we face will remain intractable. After all, how can we reform healthcare if we don’t have hospitals and drug companies that are eager to reinvent themselves? How can we “fix” our schools if these institutions are incapable of autonomous strategic renewal? And how can we avoid the economic drag of organizational inertia unless every organization, everywhere, becomes a paragon of proactive change?

In my next couple of blogs, I’ll share some ideas on how we can re-engineer our institutions to be as adaptable as they are efficient. Readers, you can help us get a head start on this topic by posting your response to the following question: What’s the one thing you would change in your organization to help it stay in front of the curve?

*Editor’s Note: Professor Hamel has spoken at several Microsoft events, and has received fees for doing so.

By itself, an externally-generated calamity is seldom enough to kill off a successful business; though a bout of seriously bad luck can deliver the coup de grâce to a company that was already on its knees.

But should we care when a company struggles or dies? Isn’t birth, growth and death the natural order of things—to be expected in organizational life just as it is in human life? Isn’t the cycle of beginnings and endings a good thing? Even a recession has it uses. Like a forest fire in an over-protected wilderness, it clears out sickly trees and gives new saplings room to grow. So while organizational failure is inconvenient for those involved (after the forest fire, campers will have to roast their marshmallows somewhere else), is it, well, a catastrophe?

Maybe we should cheer when a poorly managed company with poorly led employees, poorly served customers and poorly rewarded shareholders, finally shuffles off the stage—and releases its resources for more productive uses. My first thought when United Airlines went into bankruptcy a few years back: this couldn’t happen to a more deserving bunch of people. It’s not that I was unsympathetic to the employees who were facing the axe (even years of bad-tempered service isn’t enough to make me vengeful), it’s just that I was hoping the company’s travails would clear out some gates for a bright and snappy newcomer.

When it comes to life and death struggles of the corporate kind, my venture capitalist friends in Silicon Valley are mostly a pitiless lot. Since they’re in the business of creating new companies, they don’t care much about the old ones (unless of course the stalwarts are looking to buy). For the most part, VC’s are happy when the incumbents stumble and delighted when the insurgents surge.

Business school professors, on the other hand, usually have a keen interest in prolonging corporate life. For every book that promises to untangle the secrets of growth, there’s another that offers lessons in how to forestall death—or at least helps managers identify the warning signs of impending doom. (A few representative titles: “Permanently Failing Organizations,” “The Icarus Paradox,” “The Innovator’s Dilemma,” and my favorite, “Why Good Companies Go Bad.”) In my own book, “The Future of Management,” I offered a lot of advice on how companies can become more adaptable—and thus withstand the gale force winds of creative destruction.

Unlike those heartless VCs, my academic peers and I ooze sympathy—though our tender concerns may not be entirely selfless. A few years back, I was giving a talk at an academic conference on the problem of reinventing strategy in large organizations. Halfway through my disposition, Professor Henry Mintzberg, ever the contrarian, raised his hand. “Why,” he asked, “do you care about extending the life of big companies? Is it because they’re the only ones that can afford your fees?” Haha. Very funny, Henry. I fumbled my way through an answer, but the distinguished professor had a point: Whose interests are really served when one works to extend the life of a big company—and whose interests are, perhaps, trampled upon?

Given the recent spate of multi-billion dollar bailouts for serially incompetent companies, Henry’s question is more timely now than ever. General Motors, Chrysler and Citi are just a few of the laggards and miscreants who’ve been provided taxpayer-funded ventilators and respiratory therapists. In a recent article the Financial Times reports that nearly $60 billion of government loans and subsidies have been handed out to U.S. car-makers and suppliers over the last nine months. But is this a good use of the public purse? Did these companies get rescued because society has a long-term stake in their continued existence, or because they had political muscle? One hint: GM agreed to postpone the closure of a parts distribution facility in Massachusetts after a meeting between Fritz Henderson, GM’s CEO, and the chairman of the House Financial Services Committee, Barney Frank, this according to the Hill’s Blog Briefing Room. Once again, politics trumps business logic.

A hypothetical question: Would humanity have been well served if a herd of tender-hearted beasts, back there in the Mesozoic Era, had somehow figured out a way to keep T Rex and his mates alive? I can see the win from the dinosaurs’ point of view, but I’m not sure it would have been a net plus for you and me. And that, in a sense, was Henry’s point: Why would we want to do anything that might reduce the cold efficiency of Darwinian competition in improving the breed? Wouldn’t it be better to simply admit that destruction, whether caused by ineptitude or catastrophe is, as Schumpeter claimed, creation’s unavoidable counterpart?

So, dear blogee, what do you think? Should we give a toot when a company gets into trouble? In a dynamic economy, is there any reason to care whether a company lives or dies? Or put another way, does organizational longevity have any intrinsic value—for shareholders, employees, customers or society at large? Please share your views, and next week I’ll come back with some more of my own.

So yeah, for the moment the left-brain types have the upper hand and no one wants to hear about “the creative economy,” for cripe’s sake. Nevertheless, before we give up on our dreams we should remind ourselves, and everyone else that . . .

We owe our existence to innovation. Our species exists thanks to four billion years of genetic innovation. Since time immemorial life has been experimenting with new genetic combinations, through sexual recombination and random mutations. As human beings, we are the genetic elite, the sentient, contemplating and innovating sum of countless genetic accidents and transcription errors. Thank God for screw-ups, for if life had adhered strictly to six sigma rules, we’d all still be slime. Whatever the future holds for bipeds like us, we can be sure that happy accidents will always be essential to breakthrough innovation.

We owe our prosperity to innovation. Most of us do more than subsist. From the vantage point of our ancestors, we live lives of almost unimaginable ease. Here again we have innovation to thank. A thousand years of social innovation has given much of humanity the right to self-determination. We are no longer vassals and conscripts. We live in democratic societies where we are free to think and do as we wish—essential prerequisites for innovation. Repeated bouts of institutional innovation—including the invention of central banks, stock markets, company law and patent protection—also paved the way for economic progress, by facilitating trade, capital formation and entrepreneurship. Humanity’s giant leap into the modern age was powered by a hundred years of unprecedented technological innovation. The steam engine, the electric motor, the automobile, the airplane, the telephone, fertilizer, antibiotics, plastics, the integrated circuit—each breakthrough extended human capabilities and spawned millions of subsidiary inventions. And finally, it was management innovation—the invention of new ways of mobilizing human beings to productive ends—that turned all this potentiality into widespread prosperity. If you have a car or two in the garage, a digital device in every pocket, or a refrigerator full of food grown by someone else, you owe an enormous debt of gratitude to those early management pioneers who mastered the challenges of efficiency and scale.

We owe our happiness to innovation. As human beings, we are the only organisms that create for the sheer stupid pleasure of doing so. Whether it’s laying out a garden, composing a new tune on the piano, writing a bit of poetry, manipulating a digital photo, redecorating a room, or inventing a new chili recipe—we are happiest when we are creating. Yes, we innovate to solve problems, to make money and to get ahead. But for most of us, innovation is not a means, it is an end. To innovate, we don’t need a commercial or practical justification. We innovate because we were born to—we have no choice. From Mihalyi Csikszentmihalyi to Tal Ben-Shahar, the experts agree: human beings are happiest when they’re exercising their ingenuity. Sadly, throughout history millions of human beings have had little opportunity to exercise their creative gifts—because they lived in an age when the tools of creativity were prohibitively expensive, because they were geographically isolated and lacked contact with our innovators, or because they worked in organizations where they were viewed as semi-programmable robots. Our generation, by contrast, is blessed. We have access to dirt cheap tools (a $100 video editing program, for example); we can connect with our creative fellows around the world; and are able to share our innovations with any and all (thanks to the Web). Moreover, millions of us now work in organizations that are truly hungry for new ideas. Forget the Renaissance, the Enlightenment and the Industrial Revolution—ours is the golden age of innovation, and we should take delight in that fact.

We owe our future to innovation. It’s lucky for us that the fires of innovation are burning more brightly than ever. Today, human beings confront a daunting array of problems that demand radical new solutions. Climate change, global pandemics, failed states, narco crime, terrorism, nuclear proliferation, environmental degradation—meeting these challenges will require us to invent entirely new innovation systems. We need to learn how to solve problems that are multi-dimensional and multi-jurisdictional. In the early years of the 20th century, Thomas Edison and General Electric invented the modern R&D lab, and with it a set of much-imitated protocols that would help to generate a century’s worth of technological progress. Today, humanity’s most pressing problems aren’t merely technological; they’re social, cultural, political—and transnational. That’s why, like Edison, we must reinvent innovation. What’s needed are new meta-innovations (like idea markets, crowd-sourcing and folksonomies) that will facilitate innovation across disciplines, borders, institutions and ideologies. This is the only way we’ll solve the make-or-break challenges now facing our species. Our future, no less than our past, depends on innovation.

So don’t give up. Innovation isn’t a fad—it’s the real deal, the only deal. Right now, not everyone believes that, but they will—even those strutting accountants with shriveled right hemispheres.

And now, readers, my question: if you care about innovation—what are you doing to keep your spirits up. How are you keeping the creative fires burning in your company?

The seeds of failure are usually sown at the heights of greatness—that’s why success is so often a self-correcting phenomenon. The dynamics work like this:

Once a company becomes an industry leader, its employees, from top to bottom, start thinking defensively. Suddenly, people feel they have more to lose from challenging the status quo than upending it. As a result, one-time revolutionaries turn into reactionaries. Proof of this about-face comes when senior executives troop off to Washington or Brussels to lobby against changes that would make life easier for the new up and comers.

Years of continuous improvement produce an ultra-efficient business system—one that’s highly optimized, and also highly inflexible. Successful businesses are usually good at doing one thing, and one thing only. Over-specialization kills adaptability—but this is a tough to trap to avoid, since the defenders of the status quo will always argue that eking out another increment of efficiency is a safer bet than striking out in a new direction.

Long-tenured executives develop a deep base of industry experience and find it hard to question cherished beliefs. In successful companies, managers usually have a fine-grained view of “how the industry works,” and tend to discount data that would challenge their assumptions. Over time, mental models become hard-wired—a fact that makes industry stalwarts vulnerable to new rules. This risk is magnified when senior executives dominate internal conversations about future strategy and direction.

With success comes bulk—more employees, more cash and more market power. Trouble is, a resource advantage tends to make executives intellectually lazy—they start believing that success comes from outspending one’s rivals rather than from outthinking them. In practice, superior resources seldom defeat a superior strategy. So when resources start substituting for creativity, it’s time to short the shares.

Finally, success breeds arrogance. Caretaker executives who’ve never been entrepreneurs and have never built something out of nothing are prone to view success as an entitlement, rather than the result of innovation, gut-wrenching decisions and perseverance. Isolated from the bleeding edge of change by subservient minions, they start believing their own speeches. Unlike Andy Grove, Intel’s former CEO, they aren’t perpetually paranoid. Instead, they’re naively confident, and therefore prone to under-estimate threats and discount new competitors.

These aren’t the only things that can turn leaders into also-rans, but they’re the ones I’ve encountered most often.

In future blogs I’ll share some ideas about how a company can inoculate itself from these dangers. One quick suggestion: Treat every belief you have about your business as nothing more than a hypothesis, forever open to disconfirmation. Being paranoid is good, becoming skeptical about your own beliefs is better.

For now, readers, a question: What, in your experience, is most likely to trip up or destroy a successful company?

Dodgy quality, a toxic labor environment, incoherent brand identities, clunky power-trains, adversarial supplier relations, and subterranean resale values—these were the chronic symptoms of a management model that regarded profits as the game rather than the scoreboard, that valued financial finagling more highly than inspired engineering, and elevated MBA-types to rule over the car guys.

A scant eight months ago, GM’s then-chairman, Rick Wagoner, boasted that his company was “ready to lead for 100 years to come” —a comment that only could have been made by someone who was either naively optimistic or hopelessly delusional.

Ever since I can remember, GM’s defenders have been arguing that the company was making progress; and they were right. GM has been getting better for a very long time—but it’s been 40 years since it was the best. The Chevrolet Malibu and Corvette ZR1, the Buick Enclave and Cadillac CTS-V: these are exceptional cars by anyone’s standards. Problem is, they are even more exceptional when judged against the persistent ordinariness of GM’s other products. For years, excellence at GM has been an occasional aberration, rather than an all-consuming passion.

A company can coast for a long time when it starts with a dominant share of an enormous and hard-to-penetrate market in the world’s largest economy—but given enough time, and enough incrementally myopic decisions, and it will eventually run out of momentum.

GM is not the only company that’s sputtering right now. Motorola, Citi, NASCAR, Starbucks, Sony, United Airlines, EMI, Kodak, Alitalia, Sprint Nextel, the New York Times, Unilever, AOL and Chrysler—these are just a few of the businesses that seem to have lost their mojo. Truth is, every organization is successful until it’s not—and today, there are a lot that are not.

How does this happen? How do yesterday’s icons become today’s also-rans? How does excellence degrade? What are the causes of corporate dysphoria? These are important questions. When an organization stumbles badly everyone loses: shareholders, employees and customers. Through the years, I’ve seen a lot of companies lose their way. Here’s how it happens.

First, gravity wins. There are three physical laws that tend to flatten the arc of success. The first is the law of large numbers. We all know that it’s a lot harder to grow a big company than a small one. To grow a $40 billion company by 25% requires the creation of ten new billion-dollar businesses. To grow a $40 million company by the same percentage requires only one new $10 million business. In business as in biology, big things grow slower.

Then there’s the law of averages. No company can outperform the mean indefinitely. During the last five years of Jack Welch’s tenure at GE, the company’s market value grew from just under than $140 billion to more than $400 billion. To maintain that torrid pace, Jeff Immelt, who took over from Welch in September 2001, would have had to grow GE’s value to more than $1.2 trillion dollars by August 2006—but that was never going to happen. As you lengthen the relevant timeframe from one year to five and then to ten, the probability of out-performing the average rapidly approaches zero. In the long-run there are no growth companies.

Lastly, there’s the law of diminishing returns. The pay-off to any program focused on revenue growth or margin enhancement tends to shrink over time. Top-line growth slows as markets mature, and productivity growth slows as the knife scrapes closer to the bone. Over time, it takes more and more effort to produce less and less in the way of incremental returns. While these three laws aren’t as unyielding as gravity, they’re tough to overcome—and few companies manage it.

Second, strategies die. Like human beings, strategies start to die the moment they’re born. While death can be delayed, it can’t be avoided. Autopsies reveal three primary causes of death.

Clever strategies get replicated. Hewlett-Packard ultimately learned how to make computers as cheaply as Dell. JetBlue took a chapter out of Southwest Airlines’ playbook. Cialis and Levitra intruded on Viagra’s turf. And Facebook built on the social networking model pioneered by MySpace. While some strategies are harder to imitate than others (particularly those that yield network effects), most can be decoded by dedicated rivals.

Venerable strategies get supplanted. Digital cameras made film obsolete. Downloadable music deflated the market for CDs. Skype allowed its users to sidestep expensive tariffs. And online news aggregators hollowed out newspaper profits. Sometimes newcomers improve on an existing strategy, but occasionally they shoot it out of the sky.

Profitable strategies get eviscerated. The Internet has produced a dramatic shift in bargaining power—from producers to consumers. Armed with near perfect information, customers are able to batter down prices on just about everything. For many companies, well-informed customers are now a bigger threat to margins than well-armed competitors.

In life, death can come as a shock. In business, it never should. With the right metrics, strategy decay is largely predictable, though few companies bother to track it. And while a doddering granddad can’t abandon his decrepit body for a young and vital one, a company can—at least in theory. Companies die when they can’t escape the grasp of a dying strategy.

Third, change happens. Think of the number of things that have been changing at an exponential pace: the number of genes sequenced, the number of devices connected to the Internet, the number of mobile phones in the world, CO2 emissions, the amount of bandwidth available globally, and the production of knowledge itself. In the past, there were many things that protected incumbents from the gale-force winds of creative destruction, including regulatory barriers, technology hurdles, distribution monopolies, and capital constraints. But in most industries these bulwarks have been crumbling. Discontinuities undermine old business models and create opportunities for newcomers. So not only do strategies die, they die quicker than they used to—and that’s a fact. Over the past few decades, product- and technology-based advantages have become more fleeting. At the same time, the correlation between current and future earnings performance has become progressively weaker.

Fact is, most businesses were never built to change—they were built to do one thing exceedingly well and highly efficiently—forever. That’s why entire industries can get caught out by change—industries like big pharma, publishing, recorded music and the major U.S. airlines. In a world where change is shaken rather than stirred, the only way a company can renew its lease on success is by reinventing itself root and branch, before it has to—a feat that even the smartest companies have trouble pulling off.

Without doubt, the greatest threat to success is success itself. So next week: how success corrupts.

But first, readers, a question: Do you know a company that’s currently struggling with an out-of-date business model or strategy? If so, how did they miss the future? What should they have done differently?