Considered one of the world’s most influential management thinkers, Gary Hamel sat down with Selling Power magazine publisher Gerhard Gschwandtner for an in-depth discussion about the fundamental changes that have occurred in management and creating a team that produces results based on the new principles of innovation, collaboration, and community. In this exclusive interview, Hamel reflects on the changes that will drive management.

Selling Power (SP): Where do you think [management consultant] Peter Drucker’s view of management left off and yours begins?
Gary Hamel: I would refer to that as the difference between Management 1.0, which is based on a set of principles around standardization, specialization, hierarchy, alignment, control, and the use of extrinsic rewards, and Management 2.0. That Management 1.0 model, or the management model that is based on those principles, was invented about 100 years ago. In Management 2.0, things have shifted to a management environment of highly adaptable, innovative, and engaging places to work.

SP: What are the reasons behind this management shift?
Hamel: Management 1.0 essentially was invented to solve the problem of efficiency. The challenge was to drive variability out of production, product, and all processes so you ensure conformance to standards, which is a very important problem to solve. That management model is called bureaucracy.

I would say there are three broad challenges to supplanting the old model. The first is building organizations that change ahead of the curve. By the time Bill Gates understood that Google was a serious competitor and Microsoft better worry about search, it was already game over. By the time the top guys at Intel realized that mobile devices were going to be a far bigger market than PCs and they’d need a completely different kind of process or architecture, it was already there. To meet the sheer increase in competitive intensity worldwide, the only way to outgrow competitors or the economy is to outinnovate everyone else. Historically, you could rely on capital barriers, technology barriers, customer inertia, distribution monopolies – a whole variety of things – to protect margins without having to constantly worry about reinventing the game.

The second is getting really serious about innovation, to make innovation a systemic capability by which every management process across the company facilitates, rather than frustrates, experimentation, creativity, and new thinking. Go down to the sales force, the people in the call centers, the administrative assistants, people in the warehouses, and ask if they’ve been trained as innovators, if the company ever invested in their innovation skills. If they have an idea, ask how long it would take or how much bureaucracy they would have to go through to get the CEO’s time and a couple thousand dollars to start experimenting with an idea. Finally, would anybody notice if they don’t innovate? Does [innovating] affect compensation or job reviews? Is there an expectation that employees will be innovating, or is the expectation mainly just to do the job?

The third challenge is that knowledge itself is becoming commoditized at an accelerating pace. If you look at the data across many different sources, you discover that fewer than 20 percent of workers around the world are truly engaged in their work. But in the “creative economy,” in which the next idea can come from literally anywhere, you can’t have an organization in which most people do not feel motivated to bring their unique gifts to work.

I think most managers still see their job as, “How do I get the people who work for me to serve the organization’s goals?” rather than, “How do I build a working environment and a sense of purpose that is so compelling and energizing that people willingly bring me these gifts?” We have to look at the organization as the vehicle through which people accomplish their dreams.

SP: Where do you think the corporate world is moving to in the future?
Hamel: We are moving to a world where everything is in some way configurable by the ultimate consumer. Or, as it’s sometimes said, every industry is being reinvented from the customer backward. My argument has been for a long time that consumers are getting better at finding exactly what they want than advertisers are at predicting what they want. I don’t care how much data you give [advertisers], it is still a very poor representation of what is going on in the customers’ heads right now. So now with the Web, companies don’t need to get in front of consumers. They don’t need to know you are there. When they need you, they’ll find you. It’s that simple.

SP: What about the feelings customers have about a company?
Hamel: As our economy becomes more of a service economy, value gets created in the interaction between the employee and customer. So either you have people who are excited and turned on and empathetic with the customer or not. I think a lot of the challenge in building a deeply customer-centric company is being very attentive to the dozens of small ways that companies can piss customers off.

And moreover, a lot of service businesses are now so standardized and procedural that somebody locally can’t even run an experiment and say, “Let’s try this without getting a lot of permission.” It is interesting how long we’ve been talking about becoming more customer focused, and yet in most industries there is still a long, long way to go.

SP: Can enlightened, innovative, collaborative, and community-focused managers actually improve things and be ahead of the change curve?
Hamel: If we are going to make our organizations fundamentally more adaptable, innovative, and inspiring, we need not only new practices, but also new principles. I think, because of the management systems we have, the way we allocate capital, the ways we hire, train, plan, motivate, measure, control – all of that was very highly optimized to produce efficiency, which is not a bad thing. This is not an either/or. But we need organizations that are adaptable and efficient, innovative and disciplined, engaging and focused. Fifty-some years later, we still have organizations that often feel dehumanizing because the old technology of Management 1.0 has had a very long head start, and it is deeply entrenched in how we think.

SP: What about the democratization of organizations?
Hamel: At a company like Whole Foods, for example, where team members work in a particular section of the store – in produce or meat, say – if they are going to hire someone new, then that candidate comes and works with that team for several weeks, and then it takes a 70 percent vote of the team to decide whether the candidate will join or not. Literally everyone can decide.

I think you have to start by recognizing that we are all prisoners of the familiar, of what we have seen, because most organizations are more or less alike. We have a set of very deeply embedded orthodoxies or dogmas that are not based in scientific fact about how organizations work. They are not immutable laws of the universe. They are just the dead hand of tradition. So if you want to change the reality, the first thing for a new manager to do is to step back and say, “How much of what I believe about how you motivate, drive change, drive innovation – how much of all that is a timeless truth, and how much of that is just hand-me-down beliefs?”

For example, I wrote a cover story for Harvard Business Review about a tomato-processing company, the largest in the world. They are a bit more than 30 years old. They beat most of their competitors, by far the most efficient in the world. It’s a business that earns approximately $750 million per year with 400 full-time employees. And there’s no management hierarchy at all. There is not a single supervisor or boss; nobody uses those terms in the company. Individual employees negotiate their responsibilities with peers, and the performance reviews and salaries are set through a peer process. Every employee has the company’s checkbook and can purchase equipment or whatever is needed. It happens without getting a lot of approvals. It does require that managers step back for a moment and start to ask, “Are there other ways of doing this?”

SP: That sounds great, but what makes it work? Employees could just goof off and ruin the company.
Hamel: Let’s consider discipline for a moment: every company needs a whole lot of discipline. People have to abide by ethical rules, diligently apply best practice, do their jobs in exactly the way they need to be done. In Management 1.0, how do we get discipline? Lots of supervisors, lots of very detailed policies and guidelines, very little discretion for employees. Stick to the budget, never color outside of the lines – very clearly delineated job roles. You get discipline, but you also get no creativity, no passion, and nothing else. But using peers instead of bosses becomes a very powerful motivator for most people if what you do is transparent to your peers and they can see whether you are adding value or not.

SP: It sounds like a shift from the power of me to the power of we.
Hamel: I think it might be just a little bit more subtle. For the first time in history, many-to-many communication is as easy as one-to-many. That means the elite has lost the ability to control the conversation. Whether you are a CEO or Hosni Mubarak, you are not in control of what people say about your brand. Online you assume that every idea competes on an equal footing. So the fact that you are a senior vice president doesn’t give your idea any extra weight. Secondly, the tomato- processing company has a view that what really matters is contribution, not credentials. Because when you post something – you know, you write a blog and put something up on Flicker or YouTube – nobody asks, “Did you go to film school?”

I think there will always be hierarchy. What’s critical is how those people accumulated that influence. I think of those as natural hierarchies, and they are built very much bottom up. And if you stop adding value, your power immediately dissipates, whereas in an organization, typically, power is assigned from above. And often people are there because of political connections or because they just know how to drive people hard or whatever. They are good at bureaucratic infighting. But if their employees had a choice, they would “vote them off the island,” right? So they are in leadership positions, but they are not leaders necessarily. The hierarchies in that sense are built top down.

SP: But the common view is that the traditional hierarchy has the promise of predictability, whereas the new form of management includes and incorporates a tolerance for ambiguity as one of the drivers.
Hamel: The reality is, Management 1.0 was invented to do two things primarily: First is to ensure control and conformance to very demanding standards. If you walk through an Intel lab line, a “smart mob” isn’t going to employ the level of precision and control and discipline required for that function. It’s just unbelievable attention to detail and conformance. So you have to think as you consider all of these new, amorphous, open, fluid social structures, “OK, that’s all great, and certainly that can help us overcome some of the pathologies of that top-down hierarchy, but at the end of the day, we still need this discipline.”

And get coordination. How do you meld hundreds and thousands of diverse input into something that is a whole? If you look at what it takes to assemble an Airbus A380 or a Boeing Dreamliner, the coordination problem is almost of unimaginable complexity compared, for example, to an open-source project for which most of the contributions are plug-and-play and you actually are not creating new knowledge.

But where you have aeronautical engineers, material engineers, electrical engineers, hydraulic engineers who have to co-solve fundamentally new problems in science and manufacturing, you also have to ask, “How will all of the technology help do that?” I think that’s the real challenge in management innovation, and not every company is going to end up looking like an open-source project, but it is understanding how to get the best of both.

SP: How can a company create an environment of collaboration within the context of the company’s needs to create and sell products or services?
Hamel: You either have to put up a challenge or problem that is inherently interesting to people, or you have to let them define their own agenda. People want to collaborate on things they care about. People have been socialized. The Web is an opt-in economy. You go to the sites, and you work on the things that are interesting to you. First of all, you have to let that emerge naturally around where peoples’ real passions are. Second, that kind of collaboration doesn’t work unless people feel they have the freedom to actually follow through and make a real difference. So if you want low-level collaboration, people solving problems, they have to have the operating freedom to make decisions and change things, rather than have to escalate things. Third, you just need a great technical platform where it is easy for people to find each other and work on these things.

So the three conditions for collaboration are to let people define their own problems, the things they want to work on. Make sure they have the freedom to carry through and make the changes that are necessary to exploit the opportunities that come through collaboration, and then you have to have a great platform that doesn’t get in the way.

SP: What about community passion?
Hamel: Find people with all kinds of knowledge and expertise, and then get out of the way. I think people need unscripted time. They need time to work on the things they are passionate about, because when you put people into slot-shaped roles, you get slot-shaped contributions. At [one company], at the end of the year, every employee is given a list of 20 or so names of colleagues and is asked to rank all of those names based on how much value they added. And they don’t specify what “value added” means. That is exciting, promising, amazing! But that is defined by peers, not by one boss.

SP: Where do you get managers to contribute innovative management ideas to your community, the Management Innovation eXchange?
Hamel: One of the assumptions we had to test when we built the Management Innovation eXchange was that people will be willing to do the hard work of telling complicated stories or developing complicated ideas on the Web. And it turns out, they are. We thought they would, because there are other places on the Web where that happens. The philosophy behind what we have done is very simple, and that is, there is a lot of this management innovation going on. But historically, there wasn’t a good way, or good mechanism, for discovering and documenting and then disseminating these breakthroughs.

SP: What principles would you share for others who want to create a collaborative environment of sharing information and experiences?
Hamel: Start with some kind of clear problem architecture and a purpose that is compelling to people. We started by asking, “How do we create organizations that are fit for the future and fit for human beings?” We did this project a few years back: I got a bunch of thought leaders together and we asked, “What is management’s equivalent to the human genome project to finding a cure for HIV?” You get new thinking only if you start with provocative questions. If you don’t have some kind of problem architecture and purpose, you just get a scattershot and can make no sense of it. If the problem architecture is too tight, then people feel constrained and are not going to innovate. So, one, having a compelling sense of purpose; two, having a problem architecture that is at the right level of generalization; and three, having a huge amount of personal encouragement and moderation.

SP: The site is illuminating. It’s logical and easy to dive deeper and get a lot of content out. I think it is immensely inspiring.
Hamel: I started thinking about doing this in 2007, and then we brought thought leaders to start working on the problem architecture in 2008. And then there was a year of really understanding where the bleeding edge in online collaboration was and then going out to managers and really testing the proposition and asking, “Would you use this? Is it valuable to you?” And then, we got it built. Our partners, like Dell, McKinsey & Company, and Red Hat, have all been very, very helpful.

SP: We started this interview with Peter Drucker and where he left off.
Hamel: I think today, if you want to have impact, you have to build a platform where other people can contribute and innovate. If I had the dream of becoming somebody really important, I would much prefer to be [Wikipedia cofounder] Jimmy Wales than Peter Drucker.

Gary Hamel, a fellow of the World Economic Forum and the Strategic Management Society, is currently known for his pioneering effort to reinvent management by harnessing the power of open innovation. The Management Innovation eXchange – or MIX – is an online community where the world’s most progressive business leaders share their ideas on how to build organizations that are fit for the future – and fit for human beings. The MIX (managementexchange.com) is supported by a network of strategic partners, including McKinsey & Company, the Harvard Business Review, and others. This online community has been created on Saba.com, the leading social-learning platform.

Hamel’s landmark books, which include Competing for the Future (Harvard Business Review Press, 1996), Leading the Revolution (Plume, 2002), and The Future of Management (Harvard Business School Press, 2007), have been translated into more than 20 languages. His latest book, What Matters Now: How to Win in a World of Relentless Change, Ferocious Competition, and Unstoppable Innovation (Jossey-Bass), was published in February of this year. Since 1983, Hamel has been on the faculty of the London Business School, where he is currently visiting professor of Strategic and International Management. As a consultant and management educator, Hamel has worked for such companies as General Electric, Time Warner, Nestlé, Shell, Best Buy, Procter & Gamble, 3M, IBM, and Microsoft. His pioneering concepts, such as “strategic intent,” “core competence,” “industry revolution,” and “management innovation,” have changed the practice of management in companies around the world.

To watch Gary Hamel on video and get access to the Saba-powered Management Innovation eXchange, go to managementexchange.com.