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The Second Cycle

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THE SECOND CYCLEWinning the War Against

Bureaucracy

Lars Kolind

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Library of Congress Cataloging-in-Publication DataKolind, Lars.

The second cycle : winning the war against bureaucracy / Lars Kolind.p. cm.

ISBN 0-13-173629-9 (hardback : alk. paper) 1. Industrial management. 2. Success in business. 3. Creative ability in business. I. Title.

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To everyone who struggles for their organization tobecome more relevant and innovative.


ABOUT THE AUTHOR XI

PREFACE XIII

ACKNOWLEDGMENTS XVII

CHAPTER 1 THE FIRST CYCLE: WHY SUCCESS BREEDS FAILURE 1

CHAPTER 2 THE SECOND CYCLE: A NEW PARADIGM 17

CHAPTER 3 MEANING 31

CHAPTER 4 PARTNERSHIP 43

CHAPTER 5 FROM HIERARCHY TO COLLABORATION 61

CHAPTER 6 LEADERSHIP 87

CHAPTER 7 THE TOOLBOX 97

CHAPTER 8 THREE LIVE CASE STUDIES 145

CHAPTER 9 CONCLUSION 181

APPENDIX HOW OTICON ENTERED THE SECOND CYCLE 185

INDEX 221

CONTENTS

ix


Lars Kolind, born in Denmark in 1947, is amathematician and a leader. He served as director atDenmark’s National Research Laboratory from 1981 to1984, became COO of Radiometer A/S—a world leaderin scientific instrumentation—from 1984 to 1988, andwas responsible for the dramatic turnaround oftroubled hearing aid manufacturer Oticon, which heled to world leadership during his 10 years as CEOfrom 1988 to 1998.

Kolind is involved in public work within the fields ofeducation and social welfare. He was a founder of TheDanish Competency Council, which published theworld’s first national accounts on human capital in1999. He also founded The Danish Business Networkfor Social Cohesion and The Copenhagen Center, agovernment agency that fosters partnerships betweenthe public and private sectors in Europe to fight socialexclusion.

Kolind serves as non-executive board member orchairman of a number of corporations, includingworld-leading pump manufacturer Grundfos,

ABOUT THE AUTHOR

xi

Unimerco Group, Scancom International, Zealand Pharma,Kristeligt Dagblad, and BankInvest Ventures. He is a principal ofthe Q Thought Leader Network and he serves internationalScouting as deputy chairman of the board of The World ScoutFoundation. Kolind is an adjunct professor of leadership at theAarhus School of Business. He has received several awards,including Denmark’s Man of the Year in 1996, and his work is usedas classic management cases at many leading business schoolsaround the world.

xii THE SECOND CYCLE

During the time I worked on this book in 2005, thenews was full of stories about Ford and General Motorsselling off assets, labor unions losing members, evernew problems hitting the Catholic Church, publicschools being criticized for lack of relevance, Germanindustry unable to meet competition from low-wagecountries, the Bush administration stuck in scandals,and numerous other well-established institutions indeep trouble. It seems that everybody accepts that theupward part of the corporate lifecycle must be followedby a downward part that ends with extinction. TheRoman Empire, The Soviet Union, The British carindustry, Digital Equipment Corporation, Enron, andArthur Andersen are but a few examples of thecorporate lifecycle curve that most people believe is asfundamental to business as Newton’s Law of Gravity isto classical physics.

There is little doubt that there are mechanismsassociated with success that tend to transform onceagile and creative organizations into complacentbureaucracies. However, the big question is why top

PREFACE

xiii

managers overlook these mechanisms in their own organizations,even at times when their organizations’ lack of performance isobvious to outsiders. What is it that blinds management andprevents it from taking appropriate action? Why is this diseaseallowed to develop for so long that it is often impossible to curewhen it has finally been discovered? And what can be done torevert or avoid decline and perhaps even establish a platform forrenewed growth, a second cycle?

To find an answer to these questions, I used my personalexperience as a starting point. I reflected upon the organizations Ihad worked for, either as an employee, a manager, a boardmember, or a volunteer. I searched for small things under thesurface that indicated or influenced the mechanisms behind thecorporate lifecycles. I was particularly struck by several exampleswhere organizations possessed knowledge, ideas, technologies, orpeople that could have brought them into the world league of theirindustry if opportunities had been managed properly; but theynever followed those opportunities. I realized that opportunitieswere most often lost when the organization appeared to be mostsuccessful—not when it was in trouble.

This book neither fits into the mold of a conventional managementtextbook nor is it an autobiography. My experience withconventional management textbooks is that authors often attemptto make something look like a theory that has very littletheoretical substance. Simple points that could be conveyed in aminimal amount of text are often explained and illustrated with somuch excess text that the message gets lost. On the other hand,autobiographies often seem to serve only one purpose: to celebratethe merits of the author.

I call this an experience-based hands-on management book. It iswritten for easy reading—not loaded with unnecessary theory andreferences. It is designed to be useful for managers, politicians,volunteers, students, and others who are involved in or concernedabout the future of their organizations. It recognizes currenttheories of management, but builds primarily on practicalexperience—that is, what has worked for me. I have not studiedthe behavior of hundreds of organizations in order to back up my

xiv THE SECOND CYCLE

recommendations with solid statistical evidence. However, thishas given me more freedom to express my points bluntly andclearly. You will have to determine whether theserecommendations apply to your organization.

The book has four parts.

First is an analysis of the mechanism of the conventional corporatelifecycle, in particular, why organizations become stagnate anddecline at times when they think they are highly successful.

Second, you will find a proposed design for a new platform forinnovation and growth—the second cycle. This platform stands onfour pillars and each pillar has its own chapter: meaning,partnership, collaboration, and leadership.

Third, I invite you to look into my toolbox. It contains seven toolsthat I have used to diagnose an organization, establish a newfoundation for it, and move it into a second cycle of sustainedinnovation and growth.

Fourth, I illustrate the main points of this book with three livingexamples of organizations that in my view are experiencing severedecline because they have not realized the need to move into asecond cycle. I finish by putting the examples into greaterperspective: how we could enjoy much more growth andprosperity if mature organizations were able and willing to jumpout of their conventional lifecycles and start a new second cycle.

For inspiration, I have enclosed as an appendix the mostsignificant case study I know about organizational transformation:the rebirth of troubled hearing aid manufacturer Oticon into theindustry leader in the 1990s. That story taught me about bothorganizational decline and what it can take to jump into a secondcycle. May it inspire you as well.

Throughout this book, I invite you to take a moment and reflecton your own situation or other organizations you know, in light ofwhat you read. Watch for the symbol!

—Lars Kolind

PREFACE xv


The main inspiration for this book came from my workat Oticon from 1988 to 1998. I was part of an inspiringmanagement team that worked its way through a toughturnaround and the subsequent process of building atruly knowledge-based organization. Many employeesand managers from Oticon inspired, supported, andencouraged me in this process. It is difficult toacknowledge some over others, but I want to mentionespecially six people without whom the Oticontransformation could never have succeeded: SteenDavidsen, Torben Petersen, Helle Thorup-Witt, LarsKirk, Søren Holst, and Niels Jacobsen.

Later, I continued working with design of innovativeorganizations. I am indebted particularly to Niels DueJensen, CEO of Grundfos; Kenneth Iversen, CEO ofUnimerco; and Eva Steiness, CEO of Zealand Pharma.Klaus J. Jacobs, founder and chairman of K. J. JacobsHolding and chairman of Adecco, gave me a globalperspective on business that went beyond what I hadexperienced as a CEO.

ACKNOWLEDGMENTS

xvii

xviii THE SECOND CYCLE

Many executives and associates have taken part in discussions onthe issues in this book. I thank you all for your time and passion.Academically, I have been particularly inspired by ProfessorYoram (Jerry) Wind, who gave me his book, The Power ofImpossible Thinking

Niels Christian Nielsen, founder of Q Network Inc., opened myeyes to the theory of knowledge management, and Mette Laursen,founder of LinKS, inspired me to work on learning and coaching.Klaus Fog, founder and chairman of Sigma Partners, helped meunderstand the greater perspective of the work, and Alan Webber,founder of Fast Company, helped me see the big picture in what Iwas doing. I am indebted to the late Bent Rieneck, from the DanishDefense Management Institute, who 20 years ago taught me howto establish consensus in an organization using his so-called“dialogue shop” concept. I have developed his method further intothe CCCP tool, which can be found in Chapter 7, “The Toolbox.”

My family has been a source of great inspiration and support. Mywife, Vibeke Riemer, and our four children, Kristian, Torsten, Jens,and Astrid, never turned down an opportunity to discuss findingsand concepts. It is never easy to be married to a person that isstruggling with a manuscript for almost a year. I am thankful toVibeke for continuously supporting this project. My brother,Peder, challenged my thinking and provided valuable commentsand constant encouragement in the writing process.

I needed a language to express mental models of organizations.(Prentice Hall, 2005), exactly at the time

LIFECYCLES FOLLOW THE WAY PEOPLE THINKThe history of business is paved with companies whereroaring success was followed by steep decline: DigitalEquipment Corporation, MG-Rover, and Upjohn, just tomention a few. Steep decline followed decades of pros-perous growth and industry leadership. It seems asthough a virus was allowed to enter into the once-healthy businesses. The virus gradually spread withoutmanagement or staff really bothering or even knowingwhat happened. Alarm signals were overheard or neg-lected for years. Management continued to act as if thecompany was successful, even at a point where theemerging disaster was obvious to outsiders.

That’s how a company’s lifecycle usually goes: It beginswith a period of struggle before the business takes off.Then, there is a period of rapid and prosperous growthwith frequent new product introductions, growing mar-ket shares, and high customer satisfaction. After thisgrowth period, a period of stagnation often follows, inwhich management is under increasing pressure.Consultants are brought in and management is changed,

C H A P T E R

1The First Cycle: Why Success

Breeds Failure

1

2 THE SECOND CYCLE

followed by painful downsizings that temporarily restore profitabil-ity. Mergers and acquisitions are used to create new growth andprofits through cost savings from elimination of double functions.

But the capability of the business to continue the former organicgrowth seems to have disappeared. Despite apparent financial suc-cess, the lifecycle is about to turn into a death cycle. Additionalmanagement changes, additional downsizings, and additionalmergers fail to address the key issue: The company has lost theinnovative capability, the focus, and the energy that originallymade it successful. Subsequent downsizings lead to corporateanorexia: The organization becomes leaner and weaker.

Companies die from this process, either from being taken over byothers or simply by going out of business. The first lifecyclebecomes the last. The lifecycle becomes a death cycle.

This book is about breaking the stagnation or downturn of the firstcycle and turning it into a second cycle. It helps you understand ifyou are actually in danger of being caught in the downward cycle.It suggests how you can create a new platform for a second cycleand how you can move the existing organization from the first intothe second cycle.

Cycles are determined by the way people in general, and managersin particular, think. To understand why, you need to look upon theway people think.

Imagine you are driving your car on the way to an important meet-ing. You take an alternative route with very little traffic to play itsafe. You have enough time, but not too much. Suddenly, there isa smell from something obviously burned or at least very hot.Within a split second, your brain builds what is called a mentalmodel of the situation, building upon your experience from previ-ous situations and your current situation. How far do you still haveto go? How much time do you have? What happened last time youhad a burned smell from your car? Where can you get a taxi?

Your mental model of the situation is built on very limited actualinformation: the smell of something burned. But you add all sortsof other information from past experience to provide you with therelevant framework to analyze the situation and to act. You have

CHAPTER 1 • THE FIRST CYCLE: WHY SUCCESS BREEDS FAILURE 3

stopped thinking about what you will say at the upcoming meet-ing. Not even 10 percent of your mental energy is devoted to thatany more. You have changed your mental model 100 percent, fromthinking about today’s meeting to dealing with the smell issue.After a few minutes of driving, you stop the car. Very cautiously,you open the hood to find out how serious the trouble is. Will themotor catch fire?

After a little search, you realize that the smell comes from a fewleaves that somehow have entered the motor at a hot spot. Theleaves are almost burned and there seems nothing left to be con-cerned about.

Now your mental model immediately switches back to the situa-tion before you discovered the smell: You now think of the meet-ing, the people you will talk to, and the contract you hope to land.A new mental model has entered once again based on very limit-ed information, but drawing on vast reservoirs of knowledge fromyour brain. Again, this new mental model doesn’t share the atten-tion of your mind 80 percent or so. One mental model at a timedominates your thinking 100 percent.

Mental models determine the way people think and act. Theyenable us to switch very quickly from one situation to the other.We don’t need to gather detailed information about the actual sit-uation because the brain simply chooses a mental model, down-loads it, and starts to use it.

Despite quick access, mental models have been built over long peri-ods of time. The more times you have faced a specific type of situ-ation, the more you have developed your relevant mental model.

Organizations have mental models, too, especially successfulorganizations. Organizations tend to remember their successesand failures. The more successes they experience, the moreaspects and nuances they add to their mental model. They remem-ber the development of a very successful product and how theysurprised competition with a unique marketing concept. Theyremember how a group of engineers came up with a new technol-ogy that boosted performance of the company’s product, and they don’t forget the managers that came from another industry

thinking they could change this industry without fully under-standing it.

Organizational memory is the foundation for their mental model.It defines their success formula, such as “The H-P Way,” and itdetermines their reactions to problems and opportunities. Itguides their thinking and defines their horizon. The more suc-cessful the organization is, the stronger its mental model becomes.

As an illustration, let us go back and take a look at how the men-tal model of my former company, Oticon, emerged in the 1970sand 1980s.1

HOW OTICON BECAME DEAFIn the 1960s, Oticon was a small local hearing aid manufacturerserving primarily local and regional markets with Denmark as itshome base. Denmark, however, had a unique combination of threefactors that were found nowhere else in the world:

■ Research within the field of sound had reached a world-leadinglevel at the Technical University of Denmark.

■ Ear, nose, and throat (ENT) doctors at Danish hospitals werehighly focused on better hearing care to their patients in addi-tion to cost-effective care. This was unlike doctors in othercountries, such as the United Kingdom, that focused almostentirely on cost reduction within hearing care. In other words,Denmark’s doctors went for greater value, whereas most oth-ers went for cost reduction.

■ The Danish government was willing to publicly subsidize treat-ment for hearing loss at Danish hospitals—unlike any othercountry in the world at that time.

The three small Danish hearing aid manufacturers were quick totake advantage of this situation and competed fiercely to develophigher performing and more reliable products to serve the needs of

4 THE SECOND CYCLE

1 You can find the full Oticon case study in the appendix at the end of this book. It

includes both the growth and decline parts of the first cycle and the subsequent

turn-around that led to Oticon’s second cycle.

the Danish hearing care service, whereas hundreds of manufactur-ers in the rest of the world were mainly focused on cost reduction.

Within two decades, the three Danish manufacturers—and Oticonin particular—had won positions on the list of the 10 largest man-ufacturers in the world, enjoying a combined market share ofmore than 30 percent of the world market.

Oticon was the most successful of the three, and company salesand profits skyrocketed. The company grew to more than 1,000employees in about 10 countries. The four directors were seen asgurus, and salaries, pension schemes, offices, and company carsreached a level that was perceived as suitable for a world-leadingbusiness. The first cycle was at its steep growing stage.

It was in this period that Oticon’s mental model emerged. Oticon’smental model perceived hearing aids as standard hardware prod-ucts to be manufactured in large series in their highly automatedplants. It looked upon users as patients with little choice, whichwas the reality those days. The choice of hearing aid was a profes-sional one, made by audiologists and hearing aid dispensers, notby consumers. Oticon’s mental model rightly perceived acousticalperformance as the key criterion for choosing one hearing aid overthe other.

Oticon was the master that took the lead in moving hearing aidsfrom the pocket to behind the ear—a great achievement, market-ing-wise and technologically. The behind-the-ear mental model ofthe 1970s was indeed a winning formula for Oticon.

But customers wanted to move to the next stage: They wantedhearing aids to move into the ear and the ear canal, a distance ofless than an inch. However, this move was difficult from two pointsof view: Space in the ear was much smaller than behind the earand worse, the shape of ear canals differed tremendously from per-son to person. That required the behind-the-ear mass-producedproduct to become a customized one. The market moved frommass production to mass customization.

Oticon stuck to its mental model despite the apparent change inthe marketplace. Oticon honestly thought that consumers werewrong. Consumers didn’t understand what was good for them. And


professionals seemed to be so hungry for business that theyaccepted the demand for inferior in-the-ear products.

Oticon started to lose business. In Oticon’s mental model, therewas only one logical response: to develop even more superiorbehind-the-ear products so that the acoustical quality differencewould be so obvious that nobody would choose an in-the-ear hear-ing aid any more. Oticon started to refine and improve its outdat-ed mental and business model. It defended its current mentalmodel by prescribing more of the same. More of what it was goodat: high performance, behind-the-ear hearing aids.

More and more salespeople were unhappy. They reported backreactions from dissatisfied audiologists that threatened to stopdoing business with Oticon if Oticon did not enter the in-the-earsegment. They perceived Oticon to be arrogant. Oticon manage-ment fought back by ordering the salespeople not to waste theirtime talking like competitors. They should instead go out and sellthe Oticon advantage to audiologists.

Oticon continued to defend and improve its irrelevant mentalmodel for almost 10 years. And when the headwind became toostrong, Oticon’s entrance into in-the-ear hearing aids was onlyhalf-hearted.

Even at the time when custom-built in-the-ear products had cap-tured half of the world market, Oticon maintained that the marketwas wrong and the whole thing would blow over.

It didn’t.

Finally, Oticon’s response was to develop a mass-produced, stan-dard, in-the-ear product that needed no customization—that is, abehind-the-ear product to be clicked directly on to the ear mold.Sound was fine, but it looked nothing but terrible and the marketcompletely rejected it and bought the customized productsinstead.

Oticon lost market share, but continued to blame the competitionand the customers. It was only when the company lost about halfof its equity in one year (1987) that the board finally realized thatsomething radical had to be done. The upward part of Oticon’s first

6 THE SECOND CYCLE

lifecycle had lasted about 75 years. The downward part, or deathcycle, had lasted almost 10 years. During the first eight or nineyears of the death cycle, management still had the illusion that thecompany was on the upward trend. It had no idea that below thesurface of success, Oticon was heading directly into bankruptcyand extinction.

The board of directors’ diagnosis was that the company needed astrong leader that could reduce costs and restore profitability. Itprescribed more power and authority.

There is no question that Oticon needed power and authority, butthe real issue was different: how to reinstall hearing into a deafcompany. In other words, how to make a conservative companyinnovative and flexible, how to carry through a paradigm shift, andhow to break the first cycle and build a platform for a possible sec-ond cycle.

Oticon was an extreme example. It should have been obvious tomanagement that something was fundamentally wrong. But even insuch an extreme case, Oticon management—then the dream teamof the industry—did not realize that its mental model was becomingirrelevant.

Reflect for a moment. Could your organization be in the middle ofexactly the same development without management having aclue? Hopefully, your organization has not progressed too far intothe phases of decay so that you have time to take the necessarysteps; and hopefully, this book can inspire you to find out whereyou are. Remember that it is not only managers of the hearing-aidbusinesses who lose their hearing; the mechanism is the same andthe need to challenge your mental model is no less important forany industry.

THREE FACTORS THAT TURN THE LIFECYCLE CURVECompanies are caught by the cycle on their way up, not on theway down. It is when success is celebrated that the virus of arro-gance enters the body. When a CEO speaks enthusiastically about“The Company Way” or “Our Recipe for Success,” he or she opensthe company up for a virus that may be fatal five or 10 years later.


That is the virus that turns the direction of the organizational lifecycle.

Three basic factors eventually turn the lifecycle curve for organi-zations into a death cycle: size, age, and success. Table 1-1 showshow the mechanism functions.

Table 1-1 How Organizations Get on the Downward TrackSuccess: Leads to With the But the organization …Which in

more: consequence continues to blame the end leads that: others: to decline and:

Successful growth Management Management Competition that has Less action.over time involves layers. loses touch become much more three basic factors: with customers intense this year. Slower action.

Departments. and grassroots.

■ Size. Formalized Information gets Customers that have More of the same ■ Age. procedures. delayed and changed preferences action—that is, ■ Success. filtered. to much cheaper less innovation.

Long-range products.planning.

Budgeting. Arrogance The rise or fall of the prevents U.S. dollar.

Reports. management from taking The emergence of

Meetings. challenges low-cost suppliers seriously. from Asia.

Coordination.Unions that demand

Suboptimization. higher wages and expensive health schemes.

Traditions.

“Our way” mentality.

Internal friction.

Intrigue.

Before we go into each of the driving forces, think for a momentabout your own organization:

8 THE SECOND CYCLE

■ Where do you think your organization is on its lifecycle curve?

■ Have you ever heard management discuss this question?

■ Are the employees as satisfied as management with the cur-rent state of affairs?

■ Do customers feel that your organization is as service mindedand flexible as management thinks it is?

If your answers to these questions indicate that your organizationmight need a wake-up call, you are not alone. My experience isthat most organizations need it, in particular, those that havegrown beyond 100 employees, those that are more than 10 yearsof age, and those that have been reasonably successful with whatthey do.

SIZEAs organizations grow, they tend to become more fragmented.They need more management levels, more specialized depart-ments, more middle managers, more executives, more staff func-tions, more assistants and support functions, and larger corporateheadquarters.

This fragmentation introduces filters between decision makersand where the action is. In small businesses, the owners and lead-ers know every single customer, small and large. They hear aboutevery single complaint and they also meet satisfied customers thattell them what the customers like about the company. They knowevery single employee and probably their families. They are closeto where the rubber meets the road.

In a larger business, there are departments that take care of everyaspect of customer relations: marketing and sales, delivery, cus-tomer service, finance, and communication. And most top man-agers consider their primary role to be managing the whole com-pany rather than interfering with any specific department.Customers become statistics or numbers. Satisfied customersshow up as percentages in surveys. Dissatisfied customers arecounted as quality costs. Customers’ ideas for product modifica-tions or innovations may be picked up by salespeople, but rarelymake their way out of the sales department.


All of this leads to a longer distance between the places of the “realbusiness,” where the company meets the customer, and manage-ment. Information from the market does not reach management atall, or may only reach management in a refined form—for exam-ple, in statistics. In the filtering and refinement process, theessence of information is often lost. In particular, this is becausethose that do the filtering and processing tend to convey that partof the original information that they believe management wants tohear or see.

AGEAs organizations grow older, they develop traditions. It is not onlythat they conduct the New Year’s reception exactly like last year,which is highly visible. But organizations also develop their spe-cific ways of communicating internally, a culture of conflict han-dling or avoiding, and a tradition for dealing with new ideas thatmay be much less visible. Many such traditions are not even rec-ognized as specific to the company—they are just the natural wayswe do things around here.

Traditions may be very important, despite the fact that they areinvisible. If there is a tradition for lack of communication betweenthe sales department and research and development, one dayproducts will tend to meet the engineers’ needs rather than thecustomers’ needs. Age gives tradition preference over innovation.And the older the company gets, the stronger the preference fortradition gets.

SUCCESSSuccess is the most dangerous factor, however, because successinevitably leads to self-satisfaction. The more successful organiza-tions become, the happier they are with the way they currently dothings. “The H-P Way” or the “Siemens Spirit” reflects pride andhappiness with the way things are. They are mental models thatonce were successful, but are not necessarily successful any more.

10 THE SECOND CYCLE

Only rarely do organizations know concretely the true source oftheir current success. Customer surveys may indicate that superbproduct design is a strong factor, but in reality, formulas of successare more often a combination of multiple factors that don’t showup in surveys. In particular, soft factors very rarely come up—forexample, management style, fundamental company values andtheir interpretation, or a unique interplay within a group of keypeople. And long after that unique point has gone away, the organ-ization continues to believe that it possesses the secret key to suc-cess. The organization continues to perceive that it is still on theupward part of the lifecycle curve, and it often takes a dramaticcrisis to uncover the reality.

Such companies may well show growing sales and profits, butrarely through the dramatic organic growth that once created theirsuccess. Mature businesses often enjoy massive positive cash flowfrom their original (cash cow) core business. These cash flowstend to be spent outside of the core business with the result thatthe core business is milked to a degree that leaves too little for theongoing renewal and regeneration of it. Therefore, growth inmature businesses often comes from mergers and acquisitions,and profit goes up because of savings, often following large layoffs.On the surface, companies may look to be successful and healthyeven at times when their culture and capabilities are in decay.First generation management that had a passion for products andcustomers is substituted with a different type of manager that ismore financially oriented. In the short term, this may result inhigher growth and profits, but long-term sustained growth seldomcomes from clever financial management. When finance entersthe CEO’s office, passion goes out.

Success always builds on one or more unique advantages for thecompany: a uniquely valuable or cost-effective product, a uniquerelation to or control over distribution, or some other factor thatcreates a type of temporary monopoly.

The company that has enjoyed such a monopoly for some timemay make several mistakes without those mistakes having seriousconsequences. The monopoly has a built-in inertia as long as it


continues to be a monopoly. But when the monopoly is lost, whichmay happen quickly, the consequences of past mistakes add up torapid decline, which at this point is very difficult to stop. Theapparent upward part of the corporate lifecycle therefore usuallytakes much longer than the downward part, the death cycle.

DEAFNESSThere are two main components in the ear that allow hearing:

1. The three bones that transmit sound from the tympanic mem-brane in the outer ear to the cochlea, which is the sensingorgan in the inner ear.

2. The hair cells in the cochlea and the hearing center of thebrain, which processes and interprets the sounds.

When the following happens, impairment occurs:

If the ear bones lose connection, the sound is not transmitted andthe cochlea gets a poor signal. If hair cells break and the brain for-gets its natural routine in interpreting what it hears, even a goodsignal is perceived as noise.

The organizational structure and the traditions are like the bonesof the ear. If they don’t function properly, management gets a poorsignal. Culture and misperceptions of the reasons for success arelike the brain. If they don’t work properly, management misinter-prets whatever signal it gets.

The process of being caught in the lifecycle is similar to theprocess of losing one’s hearing: For many years, the hearing mayactually deteriorate without the person noticing it. And when sheactually realizes that she doesn’t hear well any more, she mostlikely rejects the problem for a decade and blames others for notspeaking clearly and loudly enough.

When people lose their hearing, an early stage reaction is to guesswhat was probably said and answer accordingly. Ask one questionand answer another. And when the problem gets more serious, thehearing impaired will listen less and talk all the time.

12 THE SECOND CYCLE

Companies behave similarly. They think they know what the prob-lem is and they act accordingly. Or they simply stop listening anddo more of the things they know best.

Neither strategy works.

In addition, organizations seldom take responsibility for what hap-pens. They tend to blame others for it: competition, currencies,customers, and globalization.

The resulting organizational deafness leads to a behavior thatseems to be independent of industry and country:

■ Organizations react more slowly to both problems and opportunities.

■ Organizations tend to respond by doing more of the same ratherthan doing something different from what they are used to.

■ Organizations maintain a self-perception of success long aftersuccess has gone away.

■ Organizations reject ideas and solutions that were not invent-ed within their organization’s walls. They consider competi-tors and customers inferior to themselves. They know better.

■ Organizations and their top management develop an increas-ingly arrogant approach to criticism. Long after they have lostthe battle, they continue to act as if they own the world.

■ Whatever may be left of entrepreneurial management is sub-stituted by “professional” or financially based management,which believes that key financial figures are its most importanttool to run the business.

■ Focus shifts from long-term value creation to short-term bottom line. Downsizing, mergers, and acquisitions becomethe dominating responses to demands for better financial performance.

■ The company team spirit changes into a culture of internalcompetition and friction. Ever more detailed internal account-ing systems are introduced to improve financial accountability.

In short, innovation often goes out as financial managementmoves in. Examples are numerous. Exceptions are few. Think ofsome from your part of the world and answer the questions in the


Food for Thought section at the end of this chapter for each ofthem. You may also want to perform the more comprehensive self-assessment in Chapter 7, “The Toolbox.”

THE FIRST CYCLE BECOMES A DEATH CYCLEThe first growth curve of a company may last from five to 50 yearsor sometimes even longer. Initial business model and product,marketing, or service concepts may be so unique that they last forgenerations with minor adjustments only. At least this was the sit-uation 20 or 50 years ago.

At some point in time, the upward trend reverts. The question isnot whether this turn occurs, but when it occurs. The downwardtrend is the second half of the first cycle—that is, the death cycle.It took Oticon about 10 years to lose everything the company hadgained in the first 75 years of its lifetime. During this period ofdecay, both management and investors may well continue to per-ceive success: Downsizing improves short-term profits. Mergers oracquisitions may boost both top-line and bottom-line growth.Ambitious management goals may lift share prices and hit newsheadlines.

It is in this period of internal decay with increasingly short-termfinancially focused management that the company needs the sec-ond cycle the most. And it is probably also the time when the com-pany most lacks the capability to create a second cycle.

This is not a new discovery, but it is a discovery that has becomemuch more important. The reason is that change happens fasterthan before, and the nature of change is different: Companiesdon’t primarily lose ground just because they are slow to adapt toa new situation. They lose because they don’t realize that the newsituation may be fundamentally new, thus requiring a fundamen-tally different approach instead of just a modified approach. Theyare so happy with their current mental model that they simplycannot imagine a radically different one.

Fundamentally, new situations occur more often than beforebecause products and services contain much more knowledge

14 THE SECOND CYCLE

than before—including new technologies and radically new mate-rials. Moreover, buying habits move quickly—for example, from aspecialized store to a hypermarket or from a physical store to theInternet.

Products as varied as eggs, cars, and banking services were oncealmost commodities. But now, you may buy eggs from differenttypes of hens that have been fed and kept differently—for exam-ple, organically. Cars often come customized in every respect, andbanks are no longer just banks.

Firms unable to anticipate or react very quickly to changing needssimply fall back. Hearing and reading the signs of the market hasbecome ever more essential. Sticking to an outdated mental modelcan be fatal.

The choice is simple, but difficult to realize: You may either con-tinue the first cycle downward or break it by fundamentally ques-tioning its basis—that is, your mental model. If you dare do so, youhave started to create the basis for your organization’s secondcycle.


FOOD FOR THOUGHT

Think of the current mental model of your organization:

■ How does the company look upon customers,

suppliers, employees, competitors, and the local community?

■ What was the situation in which these views were formed?

■ Which fundamental changes have occurred since these views

were formed?

Do you want to analyze your organization’s mental model further? Look

at Chapter 7.

Here is a short checklist to help you determine whether your organi-

zation is about to get caught in the cycle:

■ Does your organization anticipate or react to problems and oppor-

tunities as quickly today as it did when it was younger?

■ When your organization faces a problem, does it consider

responding in ways that are completely new to you?

■ Are you aware of any competitor products, technologies, sys-

tems, or marketing concepts that are clearly superior to your

organization’s?

■ Does your organization’s current organic growth match the

growth it had when it was younger?

■ Will the CEO of your company think you are a great employee if

you tell him or her that you honestly believe the company’s

business model is outdated?

■ Judging from what your company actually does, is it more impor-

tant that the company create long-term value than meet the

budget?

■ Are you and your fellow employees more empowered to make

decisions than you were 10 years ago?

If you answered “no” to two or more of these questions, you should

consider performing the self-assessment discussed in Chapter 7.

You might be surprised!

16 THE SECOND CYCLE

Aacid tests

for meaning, 36-37staff reductions, 51-52

activity, meaning versus,31-34

ageas lifecycle factor, 10of mature organiza-

tions), 182Airbus, 26annual review process in

KPM (knowledge-based people manage-ment), 133-134

assumptions (value-basedleadership), 109-113

Oticon example, 114-117, 209

automobile industry casestudy, 169-176

INDEX

221

BBMW, 26Boeing, 26break the cycle (BTC)

index, 98-102buy-sell relationships,

win-win games versus,55-56

Ccase studies

labor unions, 160-169list of, 147-148Oticon, 185-219primary school system,

148-160U.S. automobile

industry, 169-176CCCP (consensus creation

crash program), 98,118-122

changein collaborative organizations,

79-80designing for, 62-64

change process tools (CPT), 98,141-143

checklists (mental models), 15-16Chrysler, 170cleaning companies, 37-38co-ownership of organizations, 50collaboration (in collaborative

organizations), 27-29, 65,85-86

change and continuous learning, 79-80

hierarchical organizations versus, 66

leadership versus management, 66-70

multijob arrangements, 70-76physical office design, 84-85salary mechanisms, 81-83teamwork versus individual

effort, 76-78collaborative organizations,

27-29. See also knowledge-based organizations

collaboration in, 65, 85-86change and continuous

learning, 79-80hierarchical organizations

versus, 66leadership versus

management, 66-70multijob arrangements,

70-76

222 THE SECOND CYCLE

physical office design, 84-85salary mechanisms, 81-83teamwork versus individual

effort, 76-78leadership in, 95-96line-staff organizations

versus, 28meaning in, 95

acid test for, 36-37activity versus, 31-34importance of, 36mental models and, 38-40obituary test for, 37pervasiveness in

organization, 37-38second cycle and, 41-42in volunteer organizations,

34-36partnership in, 95

with competitors, 57-58employee involvement, 47employee relations, 43-49,

58-59employee stock purchase

plans, 50meaning and, 52physical workplace

concerns, 49social responsibility, 56-57staff reductions, 51-52supplier relations, 53-55zero-sum versus win-win

games, 55-56The Company of the Future

project (Oticon case study),205-207

competitors, partnership with,57-58

consensus creation crash program (CCCP), 98, 118-122

conservatism in line-staff organizations, 21

continuous learning in collaborative organizations,79-80

conventional organizations, 61-62

collaborative organizationsversus, 66

determining cost of, 74physical design of, 62-64questions to evaluate, 64-65values in, 90-91

costsof hierarchical

organizations, 74one-time costs, 22

unit costs versus, 25CPT (change process tools), 98,

141-143customers, interaction with,

139-140customization, lack in line-staff

organizations, 18-21cycles. See lifecycles

DDaimler-Chrysler, 170deafness analogy of lifecycle

factors, 12-14

INDEX 223

death cycle, 17-18first cycle into, 14-15line-staff organizations, 18-21

Dell, 26Demant, William, 186design. See physical designdialog shop (Oticon case

study), 209DigiFocus (Oticon case study),

214-217Digital Equipment Corporation, 1digital processing (Oticon case

study), 214-217downward cycle. See death cycleDue Jensen, Niels, 24

Eemployee involvement, 47, 142employee relations, 43-49, 58-59

KPM (knowledge-based peoplemanagement), 122-134

leadership versus management, 66-70

multijob arrangements, 70-76physical workplace

concerns, 49responsibilities of employees,

76-78salary mechanisms, 81-83staff reductions, 51-52stock purchase plans, 50

execution (Oticon case study), 209

existence of organizationacid test for meaning, 36-37obituary test for meaning, 37

expectations (Oticon case study), 209

Ffinancing (Oticon case study),

204-205first cycle

into death cycle, 14-15values in, 87-89

Fog, Klaus, 216Storytelling—Branding in

Practice, 37Ford, 26


GGeneral Motors, 26


Germany, 26globalization, supplier relations

and, 53-55Grundfos (water pump

manufacturer), 24social responsibility, 56

Hhierarchical organizations, 61-62


determining cost of, 74physical design of, 62-64questions to evaluate, 64-65values in, 90-91

hospitals, meaning in, 38human resources management.

See employee relations


IIBM, 26independent companies,

interdependent companiesversus, 55

individual development processin KPM (knowledge-basedpeople management), 127-129

individual effort, teamwork versus, 76-78

industrial work, knowledge workversus, 78

innovationknowledge explosion, 23-24lack in line-staff

organizations, 18-21Unimerco example, 25-27

innovation powerhouse (IP), 98,134-141

interdependent companies, independent companiesversus, 55

investment options (Oticon casestudy), 204-205

IP (innovation powerhouse), 98,134-141

IPO (Initial Public Offering),Oticon case study, 215

Ireland, 26ISO 9001 certification (Oticon

case study), 214Iversen, Kenneth, 26

J–KJacobsen, Niels, 213, 218

Kirk, Lars, 205knowledge explosion, 23-24knowledge work, industrial work

versus, 78knowledge workers, 67knowledge-based organizations.

See also collaborativeorganizations

advantages over transaction-based organizations, 22-23

one-time costs versus unitcosts, 25

transaction-basedorganizations versus, 29-30

knowledge-based people management (KPM), 98,122-134

knowledge-based primaryschools, 158

Llabor unions case study, 160-169leadership

in collaborative organizations,27-29, 95-96

management versus, 66-70value-based leadership

versus power-basedmanagement, 89-92

LEGO, 54

INDEX 225

lifecycles. See also death cycle;first cycle; second cycle

factors affecting, 7-9age, 10deafness analogy, 12-14size, 9-10success, 10-12

first cycle into death cycle,14-15

mental models and, 1-7tools. See tools

line-staff organizations, 18-21.See also transaction-basedorganizations

advantages of knowledge-basedorganizations over, 22-23


Mmanagement

aspects of, 75-76cost of hierarchical

organizations, 74employee relations, 43-49,

58-59physical workplace

concerns, 49staff reductions, 51-52stock purchase plans, 50

leadership versus, 66-70middle management in second

cycle, 93-94

power-based management versus value-based leadership, 89-92

questions to evaluate conventionalorganizations, 64-65

management developmentprocess in KPM (knowledge-based people management),131-132

manufacturing industry, line-stafforganizations in, 19

mature organizations, 181-184meaning (in collaborative

organizations), 27-29, 95acid test for, 36-37activity versus, 31-34importance of, 36mental models and, 38-40obituary test for, 37partnership and, 52pervasiveness in organization,

37-38second cycle and, 41-42in volunteer organizations,

34-36meeting room design (Oticon

case study), 202-203mental model mapper (MMM),

98, 102-109, 146case studies, 147-148

labor unions, 160-169, 179primary school system,

148-160, 178U.S. automobile industry,

169-176, 179


mental modelschecklist, 15-16employee relations, 44-49lifecycles and, 1-7meaning in organizations and,

38-40Oticon example, 4-7, 103-108supplier relations, 53-55

mentors, 75MG-Rover, 1middle management in second

cycle, 93-94mission, 32mission statements (Oticon case

study), 190-191MMM (mental model mapper),

98, 102-109, 146case studies, 147-148

labor unions, 160-169, 179primary school system,

148-160, 178U.S. automobile industry,

169-176, 179MultiFocus hearing aids (Oticon

case study), 210-213multijob arrangements, 70-76

Nnetworking. See partnership (in

collaborative organizations)Nokia, 31norms (value-based

leadership), 110Oticon example, 114-117

Oobituary test for meaning, 37obligations (value-based

leadership), 110Oticon example, 114-117

offices. See physical designone-time costs, 22

unit costs versus, 25organizational conservatism. See

conservatismorganizational development

process in KPM (knowledge-based people management),133-134

organizational meaning. Seemeaning (in collaborativeorganizations)

organizations, mature, 181-184Oticon case study, 27, 170,

185-219aspects of work, 113customer interaction, 139lifecycles and mental models,

4-7mental model example,

103-108physical design, 138value-based leadership

example, 114-117

Ppaperless office (Oticon case

study), 200-201partnership (in collaborative

organizations), 27-29, 95with competitors, 57-58

INDEX 227

employee involvement, 47employee relations, 43-49,

58-59employee stock purchase

plans, 50meaning and, 52physical workplace

concerns, 49social responsibility, 56-57staff reductions, 51-52supplier relations, 53-55zero-sum versus win-win

games, 55-56people management. See

employee relationspersonal development. See

individual developmentprocess

Petersen, Torben, 200physical design

in collaborative organizations,84-85

in conventional organizations,62-64

IP (innovation powerhouse),134-141

physical workplace concerns, 49power-based management,

value-based leadership versus, 89-92

primary school system casestudy, 148-160

professions, 75profiles in KPM (knowledge-based

people management), 123-125

Project 330 (Oticon case study),195-196

projects, 75public schools, 34-36purchasing sluice (Oticon case

study), 188

Q–Rrecruitment process in KPM

(knowledge-based peoplemanagement), 126-127

responsibilities of employees, 76-78

Ssalary

in collaborative organizations,81-83

Oticon case study, 208-209schools

primary school system casestudy, 148-160

public schools, 34-36Scouting, 34-37Sears, 26second cycle. See also

collaborative organizationsmeaning in organizations and,

41-42middle management in, 93-94Oticon case study, 185-219

Sigma, 216size

as lifecycle factor, 9-10of mature organizations, 182


Sloan, Alfred P., 170, 175social responsibility, 56-57SOL service company, physical

design, 137Southwest Airlines, physical

design, 141spaghetti organizations, 27,

65, 95Oticon case study, 206, 218

stability in conventional organizations, 62-64

staff reductions, 51-52statistics

GM financial statistics, 170Oticon sales and profits,

187, 218stock purchase plans, 50Storytelling—Branding in

Practice (Fog), 37strategy, 32success

as lifecycle factor, 10-12of mature organizations, 182

supplier relations, 53-55

TTaylor, Frederick Winslow, 62teambuilding process in KPM

(knowledge-based peoplemanagement), 129-131

teamwork, individual effort versus, 76-78

technology. See knowledgeexplosion; innovation

Think the Unthinkable (Oticoncase study), 195-196, 201

Thorup-Witt, Helle, 196tools

BTC (break the cycle) index,98-102

CCCP (consensus creationcrash program), 98, 118-122

CPT (change process tools),141-143

IP (innovation powerhouse),134-141

KPM (knowledge-based peoplemanagement), 122-134

list of, 97-98MMM (mental model mapper),

102-109, 146case studies, 147-148labor unions case study,

160-169, 179primary school system case

study, 148-160, 178U.S. automobile industry

case study, 169-176,179

VIP (value identificationprocess), 109-114

Toyota, 171-173tradition, as lifecycle factor, 10traditional organizations. See

conventional organizationstraining. See individual

development processtransaction-based organizations,

18-21. See also line-stafforganizations

advantages of knowledge-based organizationsover, 22-23

INDEX 229

knowledge-basedorganizations versus, 29-30

two-way meetings, 121, 142

UU.S. automobile industry case

study, 169-176Unimerco (tool maintenance

company)employee ownership plan, 50innovation example, 25-27meaning and, 36-37values of, 89

unions. See labor unions case study

unit costs, one-time costs versus, 25

Upjohn, 1

Vvalue identification process

(VIP), 98, 109-114value proposition, 33value-based leadership, 95-96

assumptions, 109-113Oticon example, 114-117

norms, 110Oticon example, 114-117

obligations, 110Oticon example, 114-117

power-based management versus, 89-92

valuesin conventional organizations,

90-91in first cycle, 87-89

Oticon case study, 209structure for, 92

VIP (value identificationprocess), 98, 109-114

vision, 32volunteer organizations, 34-36

W–ZWal-Mart, 26Weber, Max, 18?Whatif! (innovation consultancy

company), physical design, 137

win-win games, zero-sum gamesversus, 55-56

workplaces. See physical design

zero-sum games, win-win gamesversus, 55-56


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