Why Decentralization helps achieve "Moonshots"— Part 1

With the advance of new technologies, other possibilities for corporate management have emerged, especially decentralized management

The trajectory of companies like Google and Apple proves that in the 21st century there is the possibility of competitive advantage and considerable growth in just a few decades. This is due to both technological advances and ambitious innovation strategies. But "moonshots" can only be realized if dynamic capabilities are not limited. And that’s where decentralization comes in.

Decentralization can offer several benefits for a company that wants to grow or is already growing, even if giving up control can be difficult for the owners. For example:

1| It allows top management to focus on long-term goals instead of day-to-day problems.
daily problems.
2| Encourages responsibility and ownership of work.
3| Enables the development of talent and leadership skills in the workforce.
workforce.
4| Improves the quality and speed of decisions being made.
5| Promotes innovation and the open exchange of ideas.
6| Reduces staff turnover and increases team satisfaction.

It has to be said, however, that decentralization can also have a negative effect on a company’s processes and information flow, especially if:

1| Strong leadership is not established to give direction to the organizations.
2| Administrative and service functions are duplicated in the units.
3| ‘Silos’ and/or unhealthy rivalry arise between units.
4| Too much focus is placed on the needs of the unit, rather than the business as a whole.
business as a whole.
5| There are no uniform and consistent policies in the various units.

In this article we’ve looked at what decentralization would look like in two types of organization: the traditional one, which we’re familiar with [and we’ll cover it in the next topic], and the autonomous one, based on blockchain [which we’ll cover in Part 2 of this article].

The traditional decentralized organization

As Peter Thiel describes in Zero-to-One, the strategies in question bring new ways of seeing the world and, by valuing what others can’t see, reveal unique paths to follow.

But there are at least four significant challenges to this in traditional companies:

1| Limited resources (time and money) for strategic exercises.
2| Limited cognitive and organizational capacity (talent) for strategic exercises.
3| Limited interest from stakeholders.

4| Difficulty finding and developing unique ideas.

The first two challenges are linked to organisational capacity, while the last two have to do with the mental and creative capacity of your people.

All four challenges tend to have a significant impact on the construction of the growth and innovation strategies we’re talking about.

When a company’s organisational structure prevents employees with mental and creative capacity from seeking out and contributing to the establishment of innovative business strategies.
innovative business strategies, many opportunities can be missed.

When the mental and creative capacity of talent is not harnessed in strategies — usually because decision-making is a centralized, top-down approach — many opportunities are missed.

If you really want growth and innovation, a business leader has no reason to sit on his hands. He or she can create opportunities to overcome the four challenges mentioned through restructuring that stimulates both people’s contrarian vision and divergent thinking (mental and creative capacities) and leverages their resources.
And he does this by developing dynamic capabilities.

An organization’s capabilities, which refer to its collective skills, talents and expertise, are usually divided into two categories: ordinary (operational) and dynamic (related to strategic work).

It is well known that companies with advanced dynamic capabilities are better able to scale up and expand their businesses and respond confidently to disruption — including that generated by new technologies such as artificial intelligence (AI), the internet of things (IoT) and blockchain.

In the article ‘Designing Organizations for Dynamic Capabilities’, published in the California Management Review, Teppo Felin and Thomas Powell describe some methods for developing dynamic capabilities, three of which I will highlight here, closely associated with the decentralization that this Dossier is about: the detect-model-learn process, empowering organizational design and decentralization itself.

The detect-model-learn process. Leaders of traditional companies can seek to build dynamic capabilities by applying an approach that focuses on three categories: detecting, modeling and learning.

Detecting includes everything from how to collect new ideas and opportunities to how to capture knowledge about new technologies and opportunities, as well as identifying and encouraging the internal and external stakeholders best equipped to do this.

Modelling is about ensuring that there are enough insights and know-how within the company to shape technologies and products, as well as nurturing a culture of creating new ideas and shaping new markets.

Learning refers to knowing how to seize new opportunities, defining who decides what kind of opportunity the company will seize and the rules that stakeholders use to decide which opportunities to seize.

Empowering organizational design. Valve Corporation was founded in 1996 by Gabe Newell and Mike Harrington, former Microsoft employees. It began as a video game company, producing best-sellers such as Half Life and Portal, but evolved into a digital distribution platform, known for products such as Steam and Source-Forge. Its sales per employee and profit per employee indicators surpass those of Facebook and Google.

What’s interesting is that Valve has succeeded in a rapidly evolving environment that demands constant agility, strategic innovation and adaptation to the market — exactly the kind of environment that needs dynamic capabilities the most. How did they develop and capitalise on these capabilities?

The company itself attributes its success to the principles of the ‘Handbook for New Employees’, such as:

‘The company is yours to run — towards opportunities and away from risks. You have the power to give the green light to projects. You have the power to ship products.’

‘You weren’t hired to fill a specific job description. You were hired to be constantly looking for the most valuable work you could be doing.’

‘We’ve heard that in other companies people allocate a percentage of their time to self-directed projects. At Valve, that percentage is 100.’

Valve’s founders allow their employees to choose their own projects, recruit people for those projects and launch new products or platforms without higher approval, because they know from their experience at Microsoft — some of it hard-won — that the company couldn’t succeed without staying in the van of market innovation.

They also know that successful innovation depends on their ability to harness individual and team initiative, and that traditional forms of organizational design — functional silos, top-down hierarchical structures, routinised formal processes — tend to stifle creativity, initiative and market responsiveness.

It was to unleash the creative power of teams and individuals that Valve’s leaders opted for an alternative form of organizational architecture, a unique combination of ‘polyarchy’, social proof, self-organizing teams and open organization. This organizational design enabled dynamic capabilities.

Decentralization of systems. In the decentralization of systems in organizations, both decentralizing technologies and ‘social mechanisms’
can be used as systems (platforms) to perceive opportunities through decentralization, and build a good growth and innovation strategy.
strategy.

Decentralized organizations assign decision-making to lower-level management and even to individual teams, giving them the autonomy to take the necessary measures. The top level of the organization retains a small margin of control to make important decisions throughout the organization.

For example, they define the company’s mission, vision, strategic plan, etc. Other decisions, as well as the authority and responsibility for carrying out day-to-day operations, are delegated as far as possible to lower levels of management and sometimes even to employees, as we saw at Valve.
In most companies, we can identify a certain degree of both centralization and decentralization. One example is franchises.

While the individual shops have control over hiring, it’s the head office that is responsible for making decisions about branding, marketing, etc.

Many small businesses start out centralized and gradually decentralize as they grow, with expanding workloads and workforces putting pressure on a single individual to manage everything.

In part 2 of this article, we will explore the Autonomous Decentralized Organization, and how it differs from ‘Traditional’ Decentralized Organizations.

[*] This article was originally published in the HSM Management dossier, in Portuguese.