Entrepreneurial Ecosystem Enabling Organizations rhyme with 21C Complexity
An outline of EEEO’s key aspects and explain why this organizational approach appears to be a better fit to the 21st century business and societal environment.
September 15, 2020
An outline of EEEO’s key aspects and explain why this organizational approach appears to be a better fit to the 21st century business and societal environment.
As the loyal readers will certainly know, in the more recent months, we’ve started abstracting and developing a new approach to organizational design and development called the Entrepreneurial Ecosystem Enabling Organization.
The main inspiration for the development of such a model and approach to structuring an organization was the tight work that we’ve been doing in the last year and a half with the world-leading Chinese white goods manufacturer Haier. Haier has been a key case study that many scholars around the world have investigated in virtue of its renowned organizational model Rendanheyi, one based on a full organizational unbundling, self-management and radical user drivenness.
The principles and insights emerging from Haier’s 40 years long evolution journey certainly resonate, connect to and somehow build on top of the experience of many pioneers of self-management and self-organization, belonging to any industry and at any company size.
A non comprehensive list should definitely feature:
- Zappos and it’s semi-autonomous, double-linked, self-managed circles inspired by Holacracy.
- Morning Star and the autonomy allotted to individuals in choosing where to focus their energy, what decisions to make and how to coordinate with others through one-on-one contractual agreements for value co-creation.
- Svenska Handelsbanken that, with its 3 layers only organizational design, lack of budgeting and bonuses (even for the CEO), total responsibility attributed to local branches, gamified results evaluation, has been overperforming the market for 47 years in a row.
- W.L. Gore with no bosses, where leaders operate in self-managed teams elected and fired by their peers, tasks are self-assigned, performance is evaluated by colleagues that directly benefits from the value generated by their ideas.
- Whole Foods Markets where stores are P&L centers, fully in charge of product selection, pricing, promotion and hiring, with total transparency on operating and financials.
- Buurtzorg and its fight against organizational bureaucracy through thousands of self-managed, multidisciplinary, entrepreneurial teams of nurses that leverage technology for alignment and knowledge sharing, with minimal support structures (e.g. no HR, Planning or Marketing).
- Irizar Group with the idea of small self-managed mini-firms that choose direction and elect leaders, freely pick their goals, are accountable for their performance and share profits fairly.
- Nucor with its high levels of decentralization and P&L distribution, scarce number of managers and support profiles, extreme power distribution towards frontline teams and aggressive incentivisation program for every worker.
- Statoil (now Equinor) got rid of annual, preallocated, detailed cost budgets to spark the beyond budgeting movement.
- Valve and its famous desks-on-wheels, where management and reporting structures leave space to servant leadership, employees receive ample freedom in choosing projects, experimenting and improving.
Together with many others, these experiences offer a unique support both to better understand and to abstract the design choices embedded in Rendanheyi.
We launched a series of interviews with the aim of connecting practices, abstracting them into a common framework and giving our community the possibility to more directly explore examples of EEEOs. Check them out here.
What’s an EEEO?
Even if we’re at a very early stage of development of the EEEO abstraction, we can already outline what seem to be the key features — or dimensions — of an EEEO by putting those features in contrast with more traditional models or organizing. An EEEO is indeed characterized by a series of key elements that depart from the traditional top-down, hierarchical, model of organizing that will likely be the backdrop of most of the readers daily job.
1. From monolithic, functional organizations to micro-enterprises interconnected by coordinating structures and contracts
An EEEO is generally made of small, entrepreneurial independent units, most often characterized by their own profit & loss statement. These units overcome establishing incremental, self-referential budgets and objectives to instead embrace an outside-in defined set of leading targets, often calculated by performing better than the industry average with the goal to become a market-leading player.
To ensure coordination among otherwise competing units, the EEEO adopts two main strategies:
- Common service platforms, providing a shared set of enabling services
- Dynamic contracting processes, providing the capability to create many-to-many win-win contracts among the parties involved in enabling new user driven scenarios.
Common service platforms provide foundational services (most often and at least Finance, HR, Legal, and IT) to the micro-enterprises whose cost coverage may vary from a de-facto mandatory taxation of profiteering micro-enterprises to a market-price-driven competition or alternative market sourced options. At Zappos, the so-called “founded shared services” function by superimposing an extra % cost on the circles that need human resources help, while at Haier these internal “shared service platforms” are always set in competition with similar external providers to drive an entrepreneurial spirit.
In the EEEO context, a wishful, largely arbitrary cross-team cooperation pushed top-down is superseded by the adoption of a much more intentional, cross-microenterprise coopetition through two main approaches:
- Budgets are distributed by dynamically bidding for work, as each micro-entrepreneur candidates her ME to fill a specific request from other units
- Through technologically powered, contracting platforms, micro-enterprises establish many-to-many agreements required to achieve desired market outcomes and based on value sharing mechanisms that detail ex-ante — although adaptively — how the value created on the market will subsequently be redistributed to the participants.
A good example of the latter interconnected dynamic is represented by Haier’s Ecosystem Micro-Community Contracts that allow many micro-enterprises to commit to the realization of new user scenarios and to define how profits will be distributed across the value contributors programmatically: more details on this and other aspects are available in the EEEO Toolkit 1.0 Release Note available here: https://platformdesigntoolkit.com/eeeo-toolkit).
2. From top-down defined missions and salaries to dynamic outside-in definition of priorities and user-driven pay:
In EEEOs workers running the micro-enterprises only have partially centrally-set salaries and see part of their pay linked to customer-facing and outcome-driven value creation objectives: this dynamic creates self-set, market performance-dependent salaries and variable pays.
In Haier (in China), the basic salary is only set to cover the legal minimum salary, thus prompting the employee to continuously “bid” for new opportunities on shared internal platforms, where items of contribution (called “orders” in the case of Haier) are created and shared. In contexts like Zappos, every employee has her own centrally, HR-defined pay, although she can contribute to (or create) many entrepreneurial circles (derived from the Holacracy heritage) to produce additional profits that will be redistributed to circle members according to a 50/50 rule (50% goes to group shareholders, 50% stays within the team).
The EEEO normally abandons command and control and manager-led schemes to allow for self-organized, self-employed, micro-enterpreneurial teams that create their own strategy, have latitude on their hiring policies (being it effectively hiring or selecting employees from the pool) and set their own value distribution agreements.
The EEEO also allows for ample autonomy for what concerns leadership roles as they are filled by the team through consensus and subsequently reviewed in case of frictions.
In the most advanced contexts, employees are encouraged — sometimes obliged — to co-invest in organizational ventures and become self-motivated owners. This happens through direct investment, and at times through options’ plans that the employee can convert in shares once a liquidity event happens — as it is for Haier (in China) through VAM Contracts.
3. From management defined value propositions to investments focused on key priorities and aligned to user-driven scenarios
EEEOs remove rigid boundaries between the inside and the outside of the organization by adopting radical open innovation strategies such as user-led idea crowdsourcing, innovation crowdfunding, validation through pre-sales, and more.
The EEEO also reduces the differences between internal and external entrepreneurs, making it easy for players in the market to cooperate with internal actors: contracting aimed at creating new user scenarios is normally opened to external actors, and external entrepreneurs can pitch to create new micro-enterprises, if the organization deems the enterprise worth funding, thus becoming employees-entrepreneurs. In EEEOs, employees have easy ways to create new micro-enterprises and user-insights-led entrepreneurship is heavily praised.
Investments in an EEEO are aimed at supporting entrepreneurial efforts to create new micro-enterprises or coalitions of micro-enterprises missionized at addressing new, market-validated user scenarios. For such reasons, organizational development and growth is mainly user scenario-driven and investment-based (investing in new entrepreneurs and ventures) instead of management-driven and based on the creation of new, often bureaucratic, structures that vaguely seem to fit for new market explorations. Sometimes, like in the case of Haier, investments are made through a system of “investment platforms” that cater to different industries and areas, where the organization is actively looking for opportunities to expand organically.
Why does the EEEO resonate with current trends? Niches, verticalization and fragmentation from the lens of complex adaptive organizations
“contextually unique solutions (ed: micro-enterprises) to emerge and adapt based on a coherent whole (ed: coordinating structures & contracts)”
An outside-driven, organically entrepreneurial but emergently coherent organization design more aptly allows firms to face the exponential societal dynamics and the market disruptions we are currently living in.
It is, for example, much easier for the EEEO to let pieces of the organization die by creative destruction and — at the same time — to create new ventures that can rapidly organize around emerging opportunities or deal with growth with the required complexity that the new business landscape requires. The market characteristics we face today require indeed not just growth by centralizing, scaling up, harvesting data and creating economies of scale (large scale markets are becoming increasingly rare) but more often growth through complex systems of local and contextual independent offerings (for example for certain industry clusters or geographies).
Most of the growth pockets available today, the 80% of the market that still needs to be reorganized through the internet and digital solutions, are related indeed to smaller and smaller (verticalizing) but even more interdependent and valuable niche marketplaces. The growth pattern needed is a kind-of-fractal and self-organized way to grow, achieved by designing architectural constraints more than by directly managing teams and dictating objectives, as we’ve been able to explain in other posts.
Besides the verticalization of opportunities, it’s also clear that we can expect further fragmentation of markets due to other reasons. Some of them certainly lie in the increasingly different approaches to internet policymaking that we’re witnessing at US, EU and China level and — on top of that — in the trade wars that are often making internet regulation a geopolitical weapon, as with the Huawei or TikTok case in the US or even the backlash on Chinese applications that we’ve witnessed by Indian regulators following the clashes at the China-India border.
As brilliantly pointed out by Nicolas Colin and Benedict Evans recently:
“We’ve lived with an illusion that digital markets will always be global. And now we are realising that those markets are regional or even national. And I think we are witnessing the beginning of companies adapting their strategy to this new understanding of what it’s about to compete across several geographies in the digital economy.”
“In the past, the internet sort of ran on American rules by default, and now it won’t […] now you have different regulators applied rules, and now you have […] to comply with whatever the toughest laws are.”
On top of political reasons, market fragmentation will also result from a growing set of unfolding risk factors due to the exponential social interconnectivity we’ve been living in, through the last 20 years of globalization: a dynamic that is now generating a bounce back to social production systems characterized by lower interconnectivity.
As pointed out by complexity scientist Joe Norman on our podcast a few months ago, a decentralization of economic structures and social systems (markets, supply chains, civic institutions) is one of the means of winding down the possibly calamitous, cascading risks we are increasingly exposed to, due to global interconnectedness of the human techno-sphere.
It may be particularly useful to frame the potential of an EEEO to thrive in the increasing complexity of modern society through Ashby’s law of requisite variety. According to British psychiatrist and pioneer in cybernetics W. Ross Ashby, for a system to be stable, the number of states that its control mechanism is capable of attaining (its variety) must be greater than or equal to the number of states in the system being controlled.
Although the idea to create an organized system that can attain the complexity of the unravelled, turbulent world of the XXI century may seem naive, Joe Norman provides us with a generative interpretation lens (edited extract from our conversation whose full audio is available by clicking here):
“it’s clear that there are at least — and maybe absolutely — two routes to coherence. We think of coherence as “a lot of differentiating, differentiable, multiple units doing the same thing. That’s a coherent system. This could be generated by a system being centralized, so there’s some command center that sends out “go left”, “go right”, “up down”, and all of the units follow that command until you achieve coherence. Another way is by cascades through a system: you imagine all of the magnetic poles of particular molecules and atoms co-align in the same direction by virtue of the interactions among them locally: you also achieve coherence but in a much different, sort of local bottom up route.
When you’re facing a complex environment, as human organizations and living systems are, and the setting of ecologies, you have to respond to forces at different scales. A nice way of thinking about this is to think about a single human body: we have a skeletal muscular system with which we can generate and respond to forces at a Newtonian macroscopic scale. You can climb the tree or throw the stone, with your muscles and your skeleton. We have other systems though, too. We have the immune system: this is operating at a much different scale, dealing with complex molecular perturbations and challenges. […] if you don’t have the immune system, then you can’t respond to the molecular, microbiological environment. If you don’t have a musculo-skeletal system, then you can’t respond to the Newtonian environment. So, indeed, any organization that seeks to persist has to, by mathematical necessity, […] respond to these different challenges at different scales. So the question is, how do we enable a system to discover those natural scales of behavior that it needs to operate on? And to have enough redundancy and independence of behavior to deal — on one hand — with small-scale, fine-grained complexity, things that change rapidly in a local environment and have to be responded to, and — on the other hand — the kind of large scale forces that the system also needs?”
That’s why EEEOs are so an apt solution both to the capitalistic malaise of the modern firm and to the tidal forces of our markets: what they finally do is adopting a complexity theory lens to develop firms able to absorb the highly volatile, hyper-connected, largely unpredictable shocks of current markets without losing coherence.
By bringing to life the most powerful dynamics of complex adaptive systems, EEEOs do that by:
- Introducing micro-enterprises as autonomous but highly interdependent actors in a broader complex system.
- Establishing non-linear relationships though a multitude of unplanned, simple many-to-many interactions and exchanges among micro-enterprises.
- Enabling emergent outcomes through inter-agent, dynamic coordination embodied by EMCs (Ecosystem Micro Community contracts), voluntary bidding and smart contracts.
- Amplifying outside-in market resonance by inviting microenterprises to sense, react and measure themselves against user-driven threats and opportunities.
- Sustaining far-from-equilibrium ingenuity, conflict, friction and innovation by allowing free creation and negotiations both within and beyond company boundaries
- Maintaining the possibility to nudge or perturb the system towards strategic directions by concurrently investing on a set of selected user needs.
- Accepting uncertainty and giving the firm unprecedented levels of adaptability and resilience by massively distributing decisional power, accountability and room for experimentation to the edge.
Ecosystem Enabling and Ecosystem Defined: beyond the monopoly of the corporate and the public
While the actual practices chosen by each firm may differ, the dynamics just described in EEEOs collectively represent a quantum leap towards a new unified theory of the firm-market relationship, one that is better attuned to the current political, social and business climate. The practice of developing truly entrepreneurial, ecosystem-centric, empowering organizations is indeed a promising step towards an approach to organizing that is small-scale, outside-in, and it doesn’t aim at simplifying complexity but, instead, wants to “rhyme” with it.
Creating organizations from the outside-in could possibly mean letting the nature of the ecosystem dictate the nature of the organization that serves the purpose of developing it.
We thus firmly believe that the emergence of new frameworks of organizational design and development — such as the EEEO — together with new enabling technologies — like those proposed by Commons Stack or Aragon — will support the coalescing of multiple parties around organizing in radically new ways. In a recent conversation, Co Founder & Executive Director at Dark Matter Laboratories Indy Johar envisioned a transition from the “private economy” based on one-to-one contracting towards what he calls a “civic economy” as a result of the democratization of many-to-many contracting, powered by technologies such DLTs (Digital Ledger Technologies) and DAOs (Decentralized Autonomous Organizations). According to Johar this transition changes “the nature of how we construct value” and we believe it does it in ways that are radically disruptive to the very idea of the corporate firm and — at the same time — to the monolithicness of the state, and the public as both are based on the traditional one-to-one (provider to consumer) form of contracting.
One of Haier’s CEO Zhang Ruimin’s key cultural rules is to move away from what he calls heroic leaderships towards cultivating trust in distributed power and responsibility. The emergence of the EEEO tells us that only by embracing the idea that interdependent multitudes can run our future organizing, we can really start writing a new chapter.
What this new chapter will be about will largely depend on the complex dynamics of a society that clearly is, today, at an inflection point.
September 15, 2020