The Old Solutions Have Become the New Problems

The idea of devising new rules for managers isn't just a casual thought or theoretical exercise for me. It's personal. That's because I spent a quarter-century as a professor at the Harvard Business School, including 15 years teaching in the MBA program. I have come to believe that much of what my colleagues and I taught has caused real suffering, suppressed wealth creation, destabilized the world economy, and accelerated the demise of the 20th century capitalism in which the U.S. played the leading role.

We weren't stupid and we weren't evil. Nevertheless we managed to produce a generation of managers and business professionals that is deeply mistrusted and despised by a majority of people in our society and around the world. This is a terrible failure.The Erosion of Trust
If you've read my columns, you know that I regard this loss of trust as a big deal. Trust toward business has reached new lows, with only 10% of Americans now saying they trust large corporations, according to the Apr. 8 edition of the Financial Trust Index. Some 77% of Americans say they refuse to buy products or services from a company they distrust, according to the 2009 Edelman Trust Barometer. But the sad truth is that even before the current economic crisis, people had lost faith in business. In 2007, only 16% of Americans were confident in business leadership—vs. 55% in the mid-1960s (Harris Poll No. 19, March 2007). Even more startling: In the mid-1950s, about 80% of U.S. adults said that Big Business was a good thing for the country and believed that business required little or no change (Roper, August 1954).

When I read such surveys, I hear a cri de coeur from everyone we failed: working moms, devoted dads, dual-career couples, factory workers, office employees, eager young adults, our parents and children, the educated and uneducated, the affluent and struggling. This failure has contributed to the decline of American business, to the point that companies have had a hard time creating enough wealth to sustain prosperity for an ever-wider circle of consumers and employees. Margins have shrunk steadily for 40 years; return on sales for the Fortune 500 has been declining since the early 1960s.

Many companies reacted to this decline by finding new ways to cut costs. The Harvard Business School, along with other business schools, taught them how: outsourcing, off-shoring, downsizing, reengineering, and finding new overseas markets for old products. Under the flag of "shareholder value," (a concept honed by HBS faculty and glorified in many of our courses), firms also turned to "financialization," another specialty of the curriculum. Since the 1980s, goods-producing firms have made more of their revenue and profits from finance than from selling their products.Rules for a New Era
Historians observe that financialization is a typical indicator of economic decline. It moved the locus of control of the U.S. economy to Wall Street's increasingly abstract and risky financial instruments, accelerating the downward spiral with devastating results. While fixing Wall Street will help alleviate the current crisis, it's not enough for a return to real prosperity and long-term growth. That will require a rebirth of business based on new rules for a new era.

The old rules that most B-schools have preached were invented a century ago for supplying mass consumers with affordable goods and services. They are poorly suited to the values of today's new consumers, who want help to live their lives as they choose, with personal control, voice, and a practical sense of connection. Many smart people have spent decades trying—and failing—to adapt the old model to this new pattern of consumer demand.

As Harvard—along with many other business schools—now tries to understand what went wrong, it's essential that everyone involved in business learns how to be the future. There are turning points in history when it's time to salvage what is valuable from the old and put our energies into constructing a new model based on new rules. That's what Henry Ford did when he figured out how to make a car that could be sold for $260. It's time for a reinvention of business that is just as radical. There is no detailed map of the territory ahead, but here are some rules that can act as a compass.New Rule No. 1: Race to I-Space
The old rules assumed economic value. That's why Harvard Business School students have been trained for a century in the "administrative point of view." The manager's job was to oversee and control what was inside organization space, or what they were trained to view as "my company." Everything else was a distraction. The "administrative point of view" reflects a simpler time when business was about selling a product. It teaches you to operate from the perspective of organization space—how to maximize your company's efficiency and serve its interests. It's a world of boundaries: who's inside and who's out; who's up and who's down. It's a world of producers vs. consumers, my company vs. your company, us vs. them.

Business is no longer just about the product. Now it's about solutions for the individual. Economic value is hidden in consumers' unmet needs and is released by providing people with the means to fulfill those needs. But in order to release new value, you need to get out of organization space and into the subjective space where individuals live. I call it "I-Space." This means shedding the "us-them" mentality. Now everyone is an insider.

Amazon (AMZN) and eBay (EBAY) moved into I-space and realized billions of dollars in new value in just a few years. Apple (AAPL) headed for I-space with iPod/iTunes and released massive quantities of value by giving people what they wanted on their own terms in their own space. Meanwhile, music industry executives were busy throwing tantrums in organization space and suing their most passionate customers. Microfinance achieved extraordinary results by reinventing banking from the vantage point of the people it wanted to serve, a model that is spreading from the third to the first world. The single most radical—and most lucrative—move today is to reevaluate everything your business does from the perspective of I-space. Once you head down that road, nothing will ever be the same.New Rule No. 2: Advocate, Don't Alienate
The old rules taught you to ask, "What is my product or service, and how can I sell it to you?" With that question, adversarialism was baked into the DNA of the buyer-seller transaction.

The new rules ask, "Who are you? What do you need? How can I help?" This creates a dynamic of advocacy and mutual accountability. The more trust you build, the more value you release, and the more wealth you create.

These new principles are essential in I-space, but old attitudes die hard. Enterprises trying to operate in I-space—such as Facebook, Apple, eBay, or MySpace—have each felt the sting of big blunders that violated this new rule. But President Barack Obama gets it. In his proposed overhaul of financial regulations, brokers will be compelled to put their clients' interests first. Trained in the administrative point of view, Wall Street executives are already preparing to fight the very changes that would put them on a path to new wealth creation.New Rule No. 3: Collaborate and Federate to Compete
When you're in I-Space, you need to collaborate and federate to provide the support individuals need. You can't do it alone because the needs of individuals don't conform to existing organizational and industry boundaries. This means learning how to manage what you don't control or own. These economies of trust are becoming even more important than economies of scale.

The emphasis shifts from contracts and legal sanctions to trust and transparency as companies work together, aligned with their customers' interests—sharing core values, business practices, infrastructure, and systems. Amazon's marketplace and eBay's webs of buyers and sellers are early prototypes of these federated networks. Apple and Facebook are struggling to understand the rules of engagement that should govern relationships with their applications developers. You can see them climbing a new learning curve through trial and error as they figure out how to build and sustain economies of trust.Are You Ready to Let Go?
After decades of working with adults on the challenges of transition, I know that letting go of the old rules won't be easy. No one gives up what they know without a fight. We like to think that a big shake-up like this economic crisis will unstick us, but typically crisis makes us crawl deeper into our hole and decisively assume the fetal position. Breaking free of the gravitational pull of the familiar requires the equivalent of an asteroid collision.

Letting go is a Catch-22. You don't want to let go until you have something new to cling to, but you can't discover the new thing until you let go. In between, you must cross a mystery zone. Eventually you get to the point where you can't stand the feeling of things not adding up for one more minute. That's when you take a leap of faith, and the questions start to feel more important than the answers. You're in a new place. The bad news: There are no maps. The good news? You are the mapmaker.

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