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As the pace of marketplace change has accelerated over the past two decades, we have seen a dramatic shift in the nature of business organizations. Companies have abandoned the old hierarchical model, with its clean functional divisions and clear lines of authority, and adopted flatter, less bureaucratic structures. The watchword of these new organizations is flexibility. The goal is to adapt quickly to changes while ensuring that all the pieces of the organization are able to work together effectively, without the need for a long chain of command.
But if most organizations have begun to adapt to uncertainty, most managers have not. They remain locked into the mechanical, engineering mind-set of the industrial age. They set fixed, quantified goals— a 5% reduction in manufacturing costs, a 99.5% accuracy rate in order fulfillment, a 15 point gain in customer satisfaction—and they “engineer” the organizational structures and processes required to achieve those goals in the most efficient manner possible. They assume, in other words, that any management challenge can be translated into a clearly defined problem for which an optimal solution can be designed.
This management approach works well in markets that are stable and even in those that change in predictable ways. Today’s markets, however, are increasingly unstable and unpredictable. They evolve in unforeseeable ways with unforeseeable consequences. Confronted with this kind of radical uncertainty, managers can never know precisely what they’re trying to achieve or how best to achieve it. They can’t even define the problem, much less engineer a solution. A company may successfully hit its targets for reducing manufacturing costs, improving order-fulfillment accuracy, or boosting customer satisfaction only to discover that a new technology or a new competitor has rendered its entire business obsolete.
Today’s fast-paced markets evolve in unforeseeable ways with unforeseeable consequences.
The challenge facing the general manager under these circumstances begins to resemble the challenge that the manager of new-product development has always confronted. In the unpredictable world of research and design, neither the flow of the development process nor its end point can be defined at the outset. The shape of the new product changes, often dramatically, as the effort to create it proceeds. A strictly mechanical approach to management, with its stress on clearly defined objectives, roles, and structures, would kill the creativity that lies at the heart of design. Success in new-product development requires a different kind of management and a different kind of manager.
Two Approaches to Management
Does the experience of design managers hold practical lessons for general managers who are facing increasing uncertainty in their own businesses? With that question in mind, we studied the product development activities of companies in a number of rapidly changing industries, such as cellular telephones, medical devices, automobiles, and apparel. We found two sharply contrasting approaches to management, which we term analytical and interpretive. While the analytical approach reflects the traditional managerial perspective, the interpretive approach involves a new perspective, one highly suited to rapidly changing, unpredictable markets. Both approaches are valid, but each serves very different purposes and calls for very different organizational strategies and managerial skills.
Under the analytical approach, the design of a new product is viewed as essentially an engineering challenge—as a problem that must be solved. The analytical manager seeks to define a clear objective, usually based on research into customer needs, and he identifies the resources—human, financial, and technical—available to meet that goal, as well as the constraints on those resources. The manager then divides the problem into a series of discrete components and assigns each one to a knowledgeable specialist. A dishwasher manufacturer, for example, may have market research indicating that customers are placing an increasingly high premium on low water consumption and quiet operation. In response, the company will set strict goals for reducing water usage and noise in its next generation of products. The product development leader will then assign different elements of the design problem to experts in materials, chemistry, industrial design, acoustics, and other relevant disciplines. The solution is ultimately obtained by integrating all the components in some optimal combination. The entire development effort is viewed as a single project, which must be brought to closure as quickly and efficiently as possible.
But not all the activity that takes place in product development can be accommodated within such a tightly structured analytical framework. Frequently, for example, the customer doesn’t really know what he wants or needs—as is the case today in everything from electronic commerce to biotechnology to
home entertainment. Indeed, it is often more accurate to think of the customer as having no preexisting needs at all. Those needs instead emerge out of a series of interactions, or conversations, during which the customer and the designer together discover something about the customer’s life and how the new product might fit into it. The features of the product emerge in the same way—through an ongoing give- and-take between the customer and the company, and among the various members of the product development team, including manufacturing and marketing. Nothing is fixed at the outset: not the customer’s needs, not the product itself, not even the product’s components or the elements of the manufacturing system.
The manager of an interpretive organization needs to act like the leader of a jazz combo.
When there is such a high degree of uncertainty, the development effort is better understood as an open- ended process rather than as a project in which a specific problem is solved. The role of the design organization is not so much one of analysis or problem solving as it is of interpreting the new situation— listening to and talking with customers and technical experts and discerning the new possibilities that open up through those interactions. Interpretation, no less than invention, is a highly creative process. To encourage and harness that creativity, the manager of the interpretive organization needs to act less like an engineer and more like the leader of a jazz combo. Diverse components need to be brought together— musicians, instruments, solos, themes, tempos, an audience—but their roles and their relationships are changing all the time. The goal is not to arrive at a fixed and final shape but to channel the work in a way that both influences and fulfills the listener’s—the customer’s—expectations. The interpretive manager, unlike the analytical manager, embraces ambiguity and improvisation as essential to innovation. She seeks openings, not endings. (See the insert “The View Through the Interpretive Lens.”)
The View through the Interpretive Lens
From the perspective of the interpretive manager, many traditional business practices and institutions take on a very different look. Consider, for example, how the interpretive lens might change our view of management education, corporate research and development, and the research university.
Management Education. Management education is frequently criticized for failing to imbue students with the creativity required for effective leadership and strategic thinking. Some critics go so far as to claim that the current stress on analytical problem solving “breeds out” the creative dimensions of management—the dimensions that successful leaders tend to describe not in analytical terms but in terms of vision, inspiration, and instinct. The common response to this critique is that creativity cannot be taught. Creative managers are born, not made.
The interpretive perspective challenges that view. It shifts attention away from individualistic notions of creativity, from “isolated genius” theories of innovation, and toward an understanding of creativity as a social process. It suggests a way of thinking about the creativity of organizations—of communities— rather than the creativity of individuals, and it places a new stress on orchestration and interpretation as leadership styles. The implication for education is clear: to train interpretive leaders, management teaching would need to be broadened, focusing on developing not only problem-solving skills but also the humanistic skills traditionally associated with the more interpretive fields of literature, history, and anthropology. Management would need to be viewed as much as a liberal art as a science.
Corporate Research and Development. The ongoing debate over the role of corporate R&D, and especially that of central research laboratories, is marked by two contradictory trends. Most U.S. companies that own central labs have been shrinking or dismantling them, redirecting much of their remaining R&D activity toward the shorter-term product-development needs of their business units. Meanwhile, many Japanese companies are moving in the opposite direction, seeking to build up their central labs. They have come to view their traditional reliance on other countries to make fundamental discoveries as a disadvantageous, unsustainable strategy. It is easy to view these events as reflecting competing views of the relative merits of centralization and decentralization in the organization of in- house research. The interpretive approach, though, would lead us to focus less on the organizational structure per se and more on the role of the in-house R&D unit in orchestrating conversations between the company’s business units on the one hand and the outside research community on the other.
From the interpretive perspective, the oft-told tale of Xerox’s Palo Alto Research Center (PARC) takes on a different aspect. Xerox’s inability to capitalize on PARC’s technological breakthroughs, including its pioneering research into the graphical user interface, is often used as a lesson in the failure of central research laboratories. The blame is typically placed on PARC’s close ties to Silicon Valley, which
But the jeans business changed dramatically in the late 1970s, when fashion suddenly started to play a central role. Pricey designer jeans in a multitude of styles proliferated. Denim clothing became a staple not just of work life but of night life. Seeing an opportunity to sell its products at much higher margins, Levi’s moved to take advantage of this trend, with great success. In the ensuing years, the company evolved into a true fashion leader, branching out from its traditional jeans line to its highly successful Dockers line of casual clothes and to its new Slates line of dress pants. Adept at anticipating and managing the evolution of style, Levi’s posted ten consecutive years of record sales between 1986 and 1996, as its revenues grew from $2.7 billion to $7.1 billion. In recent months, in response to weakening demand for apparel, Levi’s has moved aggressively to further sharpen its focus on the fashion end of its business.
In transforming itself from a commodity manufacturer to a fashion company, Levi’s has invested heavily in product development. Several times a year, the company prepares new collections for its major product lines. It thinks of these collections in terms of a V-shaped merchandising model. At the back of the store are the standard, perennial items—the backbone of the collection, which generates the bulk of the revenue. These items change little from year to year. At the very front of the store are new items just introduced into the collection, aimed at the fashion-conscious consumer and often geared to a particular season. In the middle are a set of items introduced in earlier collections that have sold well but have not yet earned a place in the company’s permanent collection. Products move from the front of the store to the back over their life cycle, and they may be dropped from the collection at any time.
In many ways, Levi’s method of preparing its collections is consistent with the analytical mode of product development. The effort is organized in a series of distinct phases. There are definite start and end dates, and there are “gates” through which the collection must pass as it moves toward the market. Once a design has been introduced and has spent some time on store shelves, its fate can be predicted fairly accurately, and decisions about it can be structured analytically based on hard data.
For the fashion items at the front of the store, however, the analytical approach won’t work. There is simply too much uncertainty about fashion trends, customer reactions, and even manufacturing capabilities. Levi’s manages the generation of these new-product ideas very differently from the way it manages the collection as a whole. It stresses interpreting customer needs and production capabilities, not simply analyzing them.
For its jeans line, Levi’s looks in two different directions for product innovations. One is toward the consumer. The other is toward the finishing process, which in large part determines the look and feel of the garment. In working with both the consumer and the finishing process, the design leader plays a critical managerial role for which there is no term in the analytical lexicon. One way to think about that role is as guiding the flow of a conversation.
For Levi’s, the notion of a conversation with the consumer is more than just a metaphor. The company divides the market into age segments and assigns a designer to each segment. The designer is encouraged to become immersed in the segment’s culture, to live the life of its members. She goes shopping at the stores where they shop, eats in their restaurants, dances in their clubs, listens to their radio stations, reads their magazines—all in an effort to pick out new trends. The conversation is extended into the company itself through meetings at which the designers discuss what they have seen and what they think it means, comparing developments in the lifestyles of different generations.
Levi’s is an effective listener, but it is by no means just a listener. Rather, it strives to be an active participant in the conversation. Take the case of baggy jeans—a fashion trend that emerged from the youth culture of the inner city, where it became a hallmark of rap singers and their fans. Levi’s concluded early on that the trend would spread to the general culture as rap music itself grew in popularity, and the company invested heavily in designs rooted in the trend. But the market began to level off much earlier than the company had expected. At that point, Levi’s launched an intensive advertising campaign around the rap theme. The campaign succeeded in generating a second, larger wave of demand for the new fashion, particularly among suburban teenagers. Did Levi’s create the baggy jeans fashion? Not exactly. Company managers were not sure why the advertising campaign worked, and they by no means viewed its success as preordained. What is certain, though, is that Levi’s advertising was itself as much a part of youth culture as the rap music with which the baggy jeans were originally associated. To the analytical manager, Levi’s success would seem to be the product of a mysterious chemistry, an unmanageable chain
Recently, Levi’s jeans appear to have lost a step on the street fashion scene. The company has been slow to exploit the wide-leg jeans style, the latest big fashion trend, and younger consumers have been leaving the brand for other fashion-focused merchandisers. Why did Levi’s miss the emerging trend? One reason may be that its fast-growing fashion-jeans division has become more structured and formal and has lost some of its earlier flexibility and receptivity to new fashion ideas. The company is now moving to recreate what has been lost. It is setting up another smaller fashion unit and is taking steps to renew the flow of fashion ideas that links the company to the street, to its finishers, and to the rest of the world. In effect, Levi’s is seeking to reintroduce the interpretive dimension of management that is so critical to the success of fashion-driven businesses.
Beyond Fashion
Fashion apparel is hardly a typical industry, of course, but many of its characteristics are now being replicated in other, very different industries. In many consumer-product and service sectors, for example, managers are struggling with unpredictable shifts in customer needs and unforeseen changes in technology that require a steady stream of new and different products. Even Andy Grove, CEO of the archetypal analytical company, Intel, whose product-development activities are dominated by huge design projects with thousands of people racing against tight deadlines to get the latest generation of chips to market, has acknowledged “a deep-seated conviction that our business has some of the characteristics of the fashion industry. You always have to come up with something exciting and new to stay on top.” No matter what industry a company competes in, the greater its susceptibility to shifting tastes and technologies, the greater the risk of relying wholly on an analytical style of management.
The need for an interpretive approach tends to be particularly strong in markets or industries that are still in their formative stages. A good recent example is the cellular telephone industry. At the outset, the market for cellular phones was undefined. Even the role the technology would play could not be predicted. Was a cellular phone a toy, or was it a genuine alternative to traditional wire-line systems? Was it basically a car radio, or was it a portable, handheld device? Would demand for the service be limited to a few narrow segments, or would it be universal? The nature of a cellular system, the different components of the infrastructure, the technologies used, the functions provided, the character of competition, the economics of the business—all were unclear.
The companies that have come to dominate the cellular industry all initially managed their cellular divisions using a highly interpretive approach. AT&T housed its cellular operations in Bell Labs, encouraging a climate of open-ended experimentation and discovery. Motorola organized its initial efforts around a core of engineers who operated as a flexible, ad hoc team, drawing in other members of the organization as needed and conversing directly with customers about their needs and desired product features. Matsushita’s cellular unit lacked clear functional boundaries, thus encouraging communication between its product-development and manufacturing units. Nokia’s cellular business began as a highly entrepreneurial operation with informal design procedures. Salespeople communicated directly with the product development team, often making last-minute changes to product specifications in response to customers’ requests.
Once the market began to stabilize in the middle and late 1980s, each of these companies began to reorganize its cellular division, imposing much more formal structures with much more analytical managerial approaches. The transition was most dramatic at AT&T and Matsushita. AT&T moved its cellular operations out of Bell Labs, establishing a stand-alone business unit, Network Wireless Systems, led by experienced managers drawn from other operating divisions. It also introduced a formal five-step product-development process based on a model used throughout the company. Matsushita brought in a manager from its television division to oversee the cellular business and established a clearly defined hand-off point between development and manufacturing, instituting an analytical review to ensure that the product was ready to go into mass production. Motorola and Nokia also embraced a more analytical approach, but they did not abandon the interpretive perspective entirely. Motorola limited customers’ access to the development team by appointing a set of project managers to act as points of contact, but these project managers continued to play an interpretive role in communicating between developers and customers. Nokia instituted a formal product-development process with well-defined phases marked by analytical reviews, but it still encouraged cross-functional conversations throughout the process.
Consider, for example, the concept of core competency. When a company sets out to determine what it does best, it typically takes an iterative approach, cycling between what it can do given its existing resources and what it might do given the opportunities presented in the marketplace. This back-and-forth process, essentially interpretive in nature, is almost always fruitful, revealing new possibilities as well as new constraints. Too often, though, companies rush to end the process: “These are our core capabilities, and these are the products we will produce, and these are the processes we will use to produce them.” The analyst’s need for closure terminates the interpreter’s search for knowledge. The risk is that, in an unpredictable environment, this kind of closure can be disastrous. The company can end up doing a very good job producing products no one wants to buy.
Interpretive managers, by contrast, constantly question the boundaries of their company’s core competency and sometimes even deliberately stray across those boundaries. For example, several manufacturing companies we studied—Matsushita in cellular telephones, Levi’s in fashion apparel, Oticon in medical devices—maintain small retail divisions. These divisions are probably not profitable, and they certainly lie outside their companies’ areas of core competency. But they provide direct exposure to the consumer, enabling the companies to test new-product ideas and to gather the kind of unfiltered information that cannot be supplied by independent retailers. The existence of these outlets cannot be justified through the analytical approach the companies use to evaluate their regular wholesale and retail channels. They can be understood only in an interpretive framework.
Toward a New Vocabulary
Interpretive management implies a whole new way of thinking about the work of business executives. Interpretive managers, like Chiron’s chief executive, identify and bring together individuals within and outside the company who might have something interesting to say to one another. They arrange, in other words, who should talk to whom. They also take an active role in influencing what people talk about— highlighting, for example, areas or experiences people have in common. Acting much like the host of a party, they introduce new people into groups where conversation seems to be flagging, intervene to suggest a new topic when the people don’t seem to be able to discover what they have in common, break up groups that are headed for an unpleasant argument, and guide the conversations in a general direction without seeming (or wanting) to dictate the outcome. (See the insert “The Work of Interpretation.”)
The Work of Interpretation
The work of the interpretive manager is very different from that of the analytical manager. Success requires not only a new outlook but also a new set of skills. We would make the following suggestions to managers looking to incorporate an interpretive approach into their day-to-day jobs.
Look for new ways to promote conversations about the future. Because conversation is so central to interpretation, you need to create forums and stimuli for productive, far-ranging conversations. IBM’s research division, for example, recently directed its basic scientists to get out of the laboratory and start spending time with customers. “We don’t want Capuchin monks in a monastery on a hill,” explained former IBM research chief Jim McGroddy. “Rather, we want Franciscans in the street.” The visits enable the scientists to solve customers’ problems, but that’s not their only benefit. The scientists themselves are changed by the experience; they gain a new perspective on their work that can lead to research breakthroughs back in the lab. Recalled McGroddy, “Recently, I ran into a couple of our mathematicians in the parking lot who were on their way to see a customer. Neither of them had visited a customer before, but we set it up for them and made it easy. They came back very excited by what they’d seen, and that affects the research agenda of our division.” In a similar vein, Andersen Consulting has created several virtual business environments around the world—simulations of futuristic supermarkets, retail outlets, even entire companies—where consultants can meet and talk with their clients about what new technology might help them achieve in the future. The point of these sites is not to predict what will happen but rather to stimulate thinking and discussion about what might happen.
Many people, especially engineers, are uncomfortable with the notion of open-ended, creative conversations. Therefore, you will often need to find ways to kick-start conversations. One conversational gambit that can be highly successful is the adoption of a so-called stretch goal. Whether that goal is actually achieved or not is often immaterial; the point is to force the enterprise out of its customary ways of working, to keep it moving and searching. One of the most famous stretch goals was the 6-Sigma quality target established by Motorola during the 1980s. As long-time Motorola chairman
Bob Galvin explained in a recent interview, “It doesn’t really matter what the goal is exactly, as long as it is reasonable. The point is to stimulate, to catalyze.” Motorola did not, in fact, reach its target, but the 6- Sigma program stimulated many new and highly beneficial collaborations within the company (and later also with its suppliers), a large fraction of which were unanticipated at the outset.
Pick your interlocutors carefully. It’s not enough just to talk; you need to talk with the right people. A number of equipment supply companies, for example, spend a lot of time with their lead clients—those customers that have leadership positions in their industry or that use the equipment in the most demanding or most innovative ways. A good lead client is a good interlocutor, capable of moving the conversation forward and widening the circle by bringing in others from its market segment. In the medical devices industry, companies developing new products seek to place the technology first with key users—practitioners with strong reputations in the professional community who will use the innovation in clinical trials and write papers disseminating the results.
A similar principle applies to the selection of suppliers. Instead of rebidding its parts purchases every year or so to find the lowest-cost producers, Chrysler now carefully selects one or two key suppliers for each component early on. The goal is not necessarily to select the lowest-cost supplier but rather to find partners who are able and willing to help advance the design of the component throughout the full production life of the vehicle.
Develop alloy people within your organization. In companies facing rapidly changing markets, the role of interpreters—people who can facilitate communication across organizational boundaries—is especially important. In the analytical view, communication is thought of as the exchange of packets of unambiguous information—like Morse code. It requires no interpretation to be understood. More commonly, though, the cultural and linguistic gap between different organizational units is wide, and the message must be interpreted. People who are able to bridge the gaps need to be identified and then encouraged, formally or informally, to act as interpreters. In one company we’ve studied, the managers and engineers who perform this key function are nicknamed alloy people. Just as an alloy is an amalgam of two or more metals, an alloy person represents the union of two or more points of view.
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As anyone who has hosted a party knows, these are difficult skills to master. Indeed, for most managers, the interpretive approach remains an entirely foreign concept. It is not taught as an explicit discipline in business schools, it is not part of most executive training programs, and there are few role models available. Until now, we haven’t even had a vocabulary for talking about the interpretive approach. As a result, managers often come to important tasks with blinders on, not recognizing even the possibility of an alternative to the analytical approach. Challenges that might more usefully have been treated as open- ended processes, where multiple possibilities could coexist and play off one another, are forced back into the analytical mold—where the emphasis is on clarification, on getting things straight, on eliminating the redundant, the ambiguous, and the unknown. The danger is that the rush to clarify often leads to the reification of insight, to the premature freezing of ideas—to the elimination, in fact, of the very conditions that are needed for creativity to flourish. By purging our organizations of what is ambiguous, we risk losing our sense of what is possible.
By purging our organizations of what is ambiguous, we risk losing our sense of what is possible.
This is not a risk that concerns most managers today. In fact, managers fear the paralysis of indecision, the danger of not deciding on a course of action, more than the elimination of options. They are acutely aware that organizations need closure, otherwise nothing will be accomplished. They try to structure projects that can yield optimal solutions in the face of potentially overwhelming uncertainty. And they have a very well-developed analytical apparatus for doing this. But what they lack—and what the interpretive approach offers—is a way to keep things moving forward without closure, a framework that sees in ambiguity the seeds not of paralysis but of opportunity.
