Get Self-Organized

A little chaos goes a long way. Consider that when it comes to control over processes like production, delivery, and exchange, every business model falls somewhere along a continuum. At one end are highly controlled, hierarchical production systems. Someone, whether at General Motors, Wal-Mart, or Amazon, is in charge. At the other end are self-organizing entities, where no individual or office exerts control over the operation. They are, in the best sense of the word, chaotic. At eBay and the stock exchange, for example, market participants—not a retail owner—decide what is to be sold and bought, what the price will be, and more. Now a new type of business entity is emerging: the tightly controlled, hierarchical production or distribution system with features of chaotic self-organization. Like a new species expanding into an unexploited niche, such hybrid businesses are now growing in numbers and power. A new type of business entity is emerging: the tightly controlled, hierarchical production or distribution system with features of chaotic self-organization. Self-organizing systems have forever produced integrated outcomes in nature (ecosystems) and in human societies (language). Perhaps the earliest examples of self-organizing commercial systems are town markets that, with their haggling merchants, date back to the dawn of commerce itself. But in the Internet age, self-organizing systems go beyond market exchange to produce complex, sophisticated, highly competitive products: computer operating systems (Linux), scientific blueprints (the human genome), and vast multimedia social entertainments (online games). Famously, the Linux open source community grew to become the first and only market force capable of challenging Microsoft’s hierarchical approach to software development. Hierarchical businesses like IBM (with OS/2) and Sun Microsystems (with Solaris) tried and failed to defeat the Windows near-monopoly. The Linux team, by reframing the operating system production game from hierarchical to self-organizing, gained a unique advantage and, now, a robust partnership with IBM. And think about how self-organization changed the music industry. In 1998, file sharers shifted music distribution from a hierarchy (traditional retail) to a self-organizing exchange. Six years later, the business is still reeling. Here, an attack by a self-organizing system destabilized an entire industry. It would be difficult and risky—even foolhardy—to try to wholly transform a hierarchical business model into a self-organizing one. But the potential of self-organizing systems to enhance competitiveness is becoming clear to managers of some conventionally structured businesses. Look at the hottest players in retail: Amazon, Apple iTunes, and Netflix. These businesses look in some ways like self-organizing exchanges because they provide evolving recommendations based on what communities of like-minded customers have bought. But, in fact, all three have brilliantly designed the customer experience from end to end, even more than typical hierarchical retail stores. Amazon, Apple iTunes, and Netflix are hierarchical businesses that shrewdly facilitate self-organizing exchange; in each case, a hierarchical retailer fosters and gives expression—in a sense, makes manifest — latent communities of customers with shared preferences (for books, music, or movies). And in each case, creating a system for self-organizing exchange has helped lure buyers away from competitors whose customers remain largely isolated from and ignorant of one another. Forms of such hybrid businesses also exist in the bricks-and-mortar world. Here, some companies have long combined hierarchical and self-organizing elements by giving frontline employees increasing discretionary powers—allowing salespeople in the field to make decisions on the fly that once had to come down from headquarters. Today, the ability to stream complex, real-time information to the front line gives hierarchical companies greater power than ever to exploit self-organization. Harrah’s, the casino and hotel operator, for example, wants to treat its VIP customers (the biggest spenders) exceptionally well, because the return on investment is huge. Rather than have service personnel shadow the comings and goings of these customers and direct employees to take care of them, Harrah’s increasingly gives frontline workers minute-by-minute information on who’s who, where the customers are in the establishment, how well they’re playing, who gets preferential treatment over whom, and other subtle and crucial matters. Employees, armed with this intelligence and discretionary power to bestow perks, and guided by well-defined rules and performance objectives, coddle the VIPs appropriately. Like bees working in the hive, each employee contributes in specific though unpredictable ways to the performance of the entire system—with minimal direction from managers. Finally, consider this experiment at British Petroleum. As Thomas Malone described in these pages a few months ago (“Bringing the Market Inside,” March 2004), BP devised an intracompany marketplace for buying and selling pollution credits to achieve its environmental performance objectives. Normally, pollution management would be a hierarchical, tightly controlled process with a predictable outcome—executives would set a companywide target, tell each unit its pollution quota, and expect to achieve a predetermined goal. By shifting to a self-organizing exchange, where business units join a free market of sorts, the company traded predictability for potentially higher performance. In fact, the self-organizing exchange helped BP surpass its pollution targets, enhancing its reputation while saving money. Self-organizing systems may seem risky because you can’t predict what they’ll do. But Mother Nature—and, increasingly, the experiences of successful firms—teaches us that self-organization can be robust and competitive.

Get Self-Organized

Summary.

Partner Center