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You\ufffdre Wasting Your Employees! What You Can Do About It
HBSWK Pub. Date: Apr 1, 2002

A decade of organizational restructuring has produced employees "who are more exhausted than empowered, more cynical than self-renewing," says Harvard Business School professor Christopher Bartlett. CEOs must rethink how they use their people.

by Christopher A. Bartlett & Sumantra Ghoshal

Most managers today understand the strategic implications of the information-based, knowledge-driven, service-intensive economy. They know what the new game requires: speed, flexibility and continuous self-renewal. They even are recognizing that skilled and motivated people are central to the operations of any company that wishes to flourish in the new age.

And yet, a decade of organizational delayering, destaffing, restructuring, and reengineering has produced employees who are more exhausted than empowered, more cynical than self-renewing. Worse still, in many companies only marginal managerial attention\ufffdif that\ufffdis focused on the problems of employee capability and motivation. Somewhere between theory and practice, precious human capital is being misused, wasted, or lost.

Having studied more than twenty companies in the process of trying to transform themselves, we have concluded that although structure is undoubtedly an impediment to the process, an even bigger barrier is managers' outdated understanding of strategy. At the heart of the problem is a failure to recognize that although the past three decades have brought dramatic changes in both external strategic imperatives and internal strategic resources, many companies continue to have outmoded strategic perspectives.

In the competitive-strategy model in which many of today's leaders were trained, sophisticated strategic-planning systems were supposed to help senior managers decide which businesses to grow and which to harvest. 1 Unfortunately, all the planning and investment were unable to stop the competition from imitating or leapfrogging their carefully developed product-market positions.

In the late 1980s, the search for more dynamic, adaptive, and sustainable advantage led many to supplement their analysis of external competition with an internal-competency assessment. They recognized that development of resources and capabilities would be more difficult to imitate: The core-competency perspective focused attention on the importance of knowledge creation and building learning processes for competitive advantage. 2 But this approach, too, faced limits as companies recognized that their people were not equal to the new knowledge-intensive tasks. By definition, competency-based strategies are dependent on people: Scarce knowledge and expertise drive new-product development, and personal relationships with key clients are at the core of flexible market responsiveness. In short, people are the key strategic resource, and strategy must be built on a human-resource foundation. As more and more companies come to that conclusion, competition for scarce human resources heats up.

The role of the executive in the "War for Talent" era
Senior managers at most traditional companies have been left gasping for air at the breadth and rapidity of change during the past two decades. Hierarchy has to be replaced by networks, bureaucratic systems transformed into flexible processes, and control-based management roles must evolve into relationships featuring empowerment and coaching. In observing companies going through such change, we have come to the conclusion that as difficult as the strategic challenges may be, they are acted on faster than the organizational transformation needed to sustain them. And however hard it is to change the organization, it is even harder to change the orientation and mind-set of its senior managers. Hence today's managers are trying to implement third-generation strategies through second-generation organizations with first-generation management.

In an earlier study we analyzed the evolution of CEO Jack Welch's thinking at General Electric Co. and the simultaneous adjustment of his leadership role during the company's two-decade transformations. 3 In many ways, however, Welch is an exception: Very few top executives have been able to transform themselves from being analytically driven strategy directors to people-oriented strategy framers. Yet for a traditional company to make the transition into the New Economy, that transformation is vital. In our ongoing research, we have identified three important changes the CEO must make.

A changing view of strategic resources
The hardest mind-set to alter is the longstanding, deeply embedded belief that capital is the critical strategic resource to be managed and that senior managers' key responsibilities should center around its acquisition, allocation, and effective use.

For the vast majority of companies, that assumption simply is no longer true. Without denying the need for prudent use of financial resources, we believe that, for most companies today, capital is not the resource that constrains growth. Global capital markets have opened up the supply side, while widespread excess industry capacity has reduced the demand side. The recent reversals in some sectors notwithstanding, most companies are awash in capital. Of them, many cannot even generate sufficient high quality capital-budget projects to use the available resources\ufffdand therefore go on merger-and-acquisition expeditions.

The stock market is telling managers what the scarce strategic resource is. When it values a mature, capital-intensive company like GE at ten times its book value, it is seeing something of greater worth than the physical assets recorded in financial accounts. Though the dot-com bubble burst, the exuberant and often irrational funding of technology-savvy entrepreneurs pointed to the same lesson: There is a surplus of capital chasing a scarcity of talented people and the knowledge they possess. In today's economy, that is the constraining\ufffdand therefore strategic\ufffdresource.

The implications for top management are profound. First, human-resources issues must move up near the top of the agenda in discussions of the company's strategic priorities. That means that a first-class human-resources executive must be at the CEO's right hand. Eventually, traditional strategic-planning processes will need to be overhauled and the financially calibrated measurement and reward systems will have to be redesigned to recognize the strategic importance of human as well as financial resources.

A changing view of value
Recognizing that the company's scarce resource is knowledgeable people means a shift in the whole concept of value management within the corporation.

In the early 1980s, competitive strategy was seen as a zero-sum game. Michael E. Porter, for example, saw the company surrounded by its suppliers, customers, competitors and substitutes, engaged in a battle with them to capture the maximum economic value possible.

The subsequent interest in building and leveraging unique internal capabilities caused a gradual shift in emphasis from value appropriation to value creation. As information and knowledge came to provide competitive advantage, the game shifted. Unlike capital, knowledge actually increases when shared, thus eliminating the zero-sum game. Clearly, the focus on value creation demands a different approach than a focus on value appropriation. 4

One of the most basic issues is how the value that the company creates should be distributed. Most companies operate under the assumption that shareholders, as contributors of capital, have the primary claim. But recruiting difficulties that large traditional companies face, employees' eroding sense of loyalty and cynicism over the growing gap between the compensation of those at the top and those on the front lines all indicate that value distribution must change. The rapid spread of stock options as a form of compensation shows that companies have begun to recognize that the owners of the scarce resources are no longer only the shareholders but also the employees.

The implications are profound. Top management must begin renegotiating both implicit and explicit contracts with key stakeholders, particularly with employees. Unless those who contribute their human and intellectual capital are given the opportunity to enjoy the fruits of the value creation they are driving, they will go where they have that opportunity\ufffdtypically to newer, less tradition-bound companies.

A changing view of senior managers' roles
Unlike capital, scarce knowledge and expertise cannot be accumulated at the top of the company and distributed to those projects or programs in which it will yield the greatest strategic advantage. It resides in the heads of individuals at all levels and is embedded in the relationships of work groups\ufffdthose closest to the customers, the competitors and the technology. Therefore, rather than allocate capital to competing projects (the zero-sum game), senior managers must nurture individual expertise and initiative, then leverage it through cross-unit sharing (the positive-sum game).

Already we have seen downsizing of corporate planning departments, simplification of strategic-planning and capital budgeting processes, and massive overhauls of corporate structures and processes\ufffdall in an effort both to shift initiative to those deep in the organization who possess valued expertise and to break down the barriers to effective sharing of that expertise.

But senior managers also must rethink their role in shaping strategic direction. Their main contribution has shifted from deciding the strategic content to framing the organizational context. That means creating a sense of purpose that not only provides an integrating framework for bottom-up strategic initiatives, but also injects meaning into individual effort. It means articulating company values that not only align organizational effort with the overall enterprise objectives, but also define a community to which individuals want to belong. And it means developing organizational processes that not only get work done effectively, but also ensure the empowerment, development, and commitment of all members of the organization. The philosophical shift requires executives to expand beyond strategy, structure, and systems to a simultaneous focus on the company's purpose, process, and people.

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Excerpted with permission from "Building Competitive Advantage Through People," MIT Sloan Management Review, Winter, 2002.

Christopher A. Bartlett is the Thomas D. Casserly, Jr. Professor of Business Administration at Harvard Business School.

Sumantra Ghoshal is a professor of strategic leadership at London Business School.