If Only Companies Could Focus Before and After the Crisis

"One of the best things you can learn as a business is when to say no."

- John McCraken, former VP of Sales Mercury Interactive



Companies can do amazing things like qualify leads for profitability when survival is truly at stake. Check out this article about Sequoia's "R.I.P Good Times" presentation, which they used to scare some sense into 100 of their portfolio companies.

Nothing focuses the mind (or organizations) like a crisis. If only that kind of focus could be summoned and leveraged consistently. Any ideas?

Pyramid Power - Reducing The Complexity

"To think about anything requires an image or concept of it. To think about a thing as complex as an organization requires models of something similar, something simpler, and something more familiar."

- Jamshid Gharajedaghi, Systems Thinking: Managing Chaos and Complexity

In “Organizations are Like Icebergs” I emphasized the criticality of a leader’s ability to see and think about organizations holistically. Gaining this ability is easier said than done due to how truly complex organizations are. There is an overwhelming amount of information available on every aspect of organization and management theory. Unfortunately, there are very few resources that synthesize this information in ways that make it easy to grasp and recall which key components comprise an organization and how those components are interrelated to form a whole. The Pyramid Perspective attempts to fill this resource gap by synthesizing the plethora of information that exists about how organizations work, into a simple model that provides one way to see and think about organizations holistically.

The age-old idea behind the model is to gain a deeper understanding of something complex (e. g. an organization) by leveraging a basic understanding of the properties of something much simpler and more familiar. The “something much simpler” leveraged by the model is a pyramid comprised of three key components – the apex, the core, and the base – arranged as shown in the figure below.

To begin with let’s familiarize ourselves with the key properties of our pyramid.

Basic Pyramid Properties

The apex is the most visible part of the pyramid and is typically what commands most of our attention. Often times the height of the tip of the apex is how the greatness of one pyramid as compared to another is determined.

The base is the foundation of our pyramid and is a critical factor in determining how high it can be built. The higher we wish to build the pyramid, the taller and broader the base must be and the deeper it must be embedded in the surface upon which the pyramid is being built.

The core directly supports the apex and is also a key factor in determining the ultimate height of the pyramid. The higher we wish to build the pyramid, the taller and broader the core must be.

Distribution of Mass

The mass of the pyramid decreases as you move up from the base to the apex. Therefore, the base contains the most mass. The core contains more mass than the apex but less than the base; and the apex contains the least amount of mass. For our purposes lets assume that the apex contains 10% of the overall mass of the pyramid, the core contains 40%, and the base contains 50%. Based upon how mass is distributed across a pyramid, the pyramid’s center of gravity (indicated with a star in the diagram figure above) is located approximately ¼ of the distance from the bottom of the base to the top of the apex.

Interdependence of Components

The integrity of the pyramid depends on the interdependence of the components that comprise it. In other words, if any component is missing we no longer have a pyramid. Additionally, any “change” in one component of the pyramid will affect a change in the other components. Imagine trying to change the position of the apex of an intact pyramid by pushing it to the right without also moving the core and base the same distance in the same direction. The only way to achieve this would be by breaking the pyramid into separate independent pieces, destroying its integrity.

It’s important to recognize that the fact that the apex, base, and core of the pyramid are interdependent does not mean they are equal. As we said earlier the base has more mass than any other part of the pyramid and the apex has the least amount of mass. Another way of understanding the relative worth of the parts of the pyramid is to realize that if the apex were whacked off it wouldn't be too tough to build another one on top of the foundation and core. But if the core disappeared, we’d have a much tougher job of reconstruction as 40% of the pyramid would have to be re-built.

The 3 Key Organizational Concepts

Now that we have a common understanding of the basic properties of our pyramid, we can introduce the three key organizational concepts which we will later substitute for the apex, core, and base.

The fist key concept is the collection of all stakeholders associated with a given organization, including its owners, employees, volunteers, members, shareholders, customers, beneficiaries, suppliers, and partners.

The second key concept is the collection of formal or informal processes, procedures, tools, mechanisms, techniques, technologies, and disciplines that organizational stakeholders utilize to get things done.

The third key concept is any result produced by the organization including but not limited to products, services, forecasts, hiring plans, policies, profits, losses, new stakeholders, salaries, dividends, stock prices, etc.

In the next post I will describe the concept of stakeholders in detail and explain which component - the apex, the core, or the base - of our organizational model it represents.

© 2006-2007, Donald Martin, Jr

Organizations are Like Icebergs

For more than five years, Yahoo!, Inc. has been one of the few dot-com era darlings to thrive and survive on Wall Street, since the technology bubble burst in late 1999. Having realized stock gains of 896%[1] between September of 2001 and January of 2006, the company had been navigating nicely through the chilly and treacherous waters of the recovering technology market. However, the company recently slammed into an iceberg when it was forced to re-organize[2] in order to address market concerns over its ability to compete in the social networking market, keep up with Google, deliver key technology upgrades, and retain key employees. The market made its concerns crystal clear by devaluing Yahoo!’s stock price by 36.8% between January of 2006 and the day the reorganization was announced on December 6, 2006. How did such seasoned captains of industry as Yahoo!’s leaders slam into an iceberg? By focusing on the proverbial “tip of the iceberg” and losing sight of the foundations for profitable growth and value creation that lie below the surface.

For Yahoo!, the tip of the iceberg was the rollout of new products and business lines. Such activities are highly visible and can generate the short-term revenue growth and market buzz that can make an organization seem healthy from the outside. The rest of the iceberg – the part below the surface that the search giant’s managers lost sight of - was comprised of less visible factors, such as program management capabilities, relationships with customers and employees, and basic governance processes. Such factors are less likely to generate short-term revenue or media coverage, but are critical to realizing long-term profitable growth.

As the leaders at Yahoo! are learning the hard way, managing organizations is a lot like navigating around icebergs. Attempting to navigate around an iceberg by focusing solely on its tip can spell disaster for a captain, her ship and its crew. Similarly, when leaders lose sight of the whole organization they and their organizations frequently slam into obstructions they never saw coming. Only by learning to consistently see and manage their organizations holistically, can leaders at Yahoo! and other organizations safely navigate the tumultuous waters of an ever-changing market economy.

For the more than fifty years a number of prominent management thinkers and organizational theorists (Ackoff, Senge) have written about the criticality of a leader’s ability to see and manage organizations holistically. Among them is Peter F. Drucker, who is considered by many to be the inventor of modern management and was a close advisor to some of the most respected business leaders in the world. The criticality of seeing the whole organization was a central tenet of the business management philosophy for which Drucker is world renowned. He said that “…[management is] looking at business as a whole…[3]” and that “The manager has the task of creating a true whole that is larger than the sum of its parts…[4]”

Despite the important teachings of Drucker and others, it remains quite easy and quite common for managers to lose sight of the whole organization. Why? Because in the same way that 90% of an iceberg’s mass lies hidden beneath the surface[5], most of an organization’s value is invisible to most managers. Ironically, this value is not hidden by some external obstruction, but is made invisible by a manager’s internal mental models. Mental models are “deeply ingrained assumptions, generalizations, or even pictures or images that influence how we understand the world and how we take action.”[6] Extremely powerful, they are profoundly shaped by our past failures, our past successes, our educations, and the tools we are most comfortable using.

It’s difficult to overstate the influence that a manager’s mental models can have over how she interprets reality and makes critical decisions. For this reason mental models have been an important topic for a number of respected management authors (Argyris, Morgan, Senge,) for the last 30 years. In fact ,Clayton M. Christensen wrote two revealing best sellers, The Innovator’s Dilemma and The Innovator’s Solution, about how the mental models of the managers of market leading companies led to the loss of significant market share to new entrants. Due to how their past successes had shaped their mental models, market leaders repeatedly ignored disruptive innovations that threatened their market positions. When they looked at the competitive landscape through the invisible filter created by their mental models, they literally couldn’t see the future value of cheaper ways to serve non-consumers and over-served clients. Unhampered by perspectives incompatible with rapidly changing market conditions, new entrants were able to leverage disruptive innovations to gain significant market share and competitive advantage over powerful incumbents.

While our past experiences and educations form the foundation of our mental models, the tools we utilize on a daily basis can either help us broaden our perspectives or limit our ability to see the big picture. As the saying goes, “If the only tool you have is a hammer, everything looks like a nail.” Limited tools lead to limited perspectives. The tool predominately utilized by corporations is accounting and it can impede managers’ ability to see the whole organization and its full value.

According to a 2005 Accenture report on management challenges, “management systems ignore and under-manage value creating assets” because they primarily view organizations through traditional accounting tools such as balance sheets and cash flow statements. Additionally, the Brookings Institute found that in 2000, 85%[7] of the market value of the S&P 500 was “un-explained” or intangible (ĭn-tān'jə-bəl – incapable of being perceived by the senses) when viewed through the lenses of Generally Accepted Accounting Principles (GAAP).

At first glance this finding may seem unrealistic. However, the Brookings findings make perfect sense when one considers the fact that, when viewed through the GAAP perspective, dollars spent on such things as continuous improvement programs, branding initiatives, retention programs, or corporate universities are never categorized as investments. Instead, they are always categorized as expenses and the end results generated by these expenditures are never classified as assets. Constant exposure to such limiting categorizations can slowly erode a manager’s ability to recognize the value creating potential of such expenditures.

Even seasoned leaders such as Edward R. Simon, former President and COO of Herman Miller, recognize the importance of moving beyond financial tools as the primary prism through which we see organizations. According to Simon, “We have to get away from the P&L statement and design for the long term – based on understanding interdependencies. Most changes in organization structure are piecemeal reactions to problems. Real [leaders] are continually trying to understand wholes.”[8]

So what’s the solution? How can managers combat the powerful, yet hidden influences of their mental models and the standard business tools they must use to run their businesses? One way is by utilizing tools specifically designed to help them see and think about organizations holistically. The Pyramid Perspective is such a tool. It leverages the concept of pyramid building to convey a simple yet holistic model of all organizations. Through the use of this holistic model, managers can learn to readily discern the relative value and influence of the key interdependent components that comprise organizations of all types. The next few installments of The Pyramid Perspective will introduce this simple model. STAY TUNED!

© 2006-2007, Donald Martin, Jr.

[1] According to Google Finance – price on 9/21/01 was 4.34. On 1/9/06 it was 43.21. On 12/4/06 it was down to 26.86.
[2] Helft, M. (2006, December 6). Yahoo, Aiming for Agility, Shuffles Executives. The New York Times Late Edition - Final, Section C, Page 1, Column 2
[3] Peter Drucker an Intellectual Journey (Video), February 2003, Wiley; ISBN: 978-0-7879-6856-4,
[4] The Practice of Management, Peter F. Drucker, Collins/HarperBusiness 1993, Page 341
[5] http://en.wikipedia.org/wiki/Iceberg
[6] Senge, Peter, (1990). The Fifth Discipline. New York: Doubleday
[7] Lev, Baruch, “Intangibles: Management, Measurement, and Reporting ,” Brookings Institution
Press, 2001
[8] Senge, Peter, (1990). The Fifth Discipline. New York: Doubleday