Here is an excerpt from an article written byGary Hamel and Michele Zani for Harvard Business Review and the HBR Blog Network. To read the complete article, check out the wealth of free resources, obtain subscription information, and receive HBR email alerts, please click here.
Illuatrtion Credit: DAN SAELINGER
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Bureaucracy has few fans. Walmart CEO Doug McMillon calls it “a villain.” Berkshire Hathaway vice chair Charlie Munger says its tentacles should be treated like “the cancers they so much resemble.” Jamie Dimon, the CEO of JPMorgan Chase, agrees that bureaucracy is “a disease.” These leaders understand that bureaucracy saps initiative, inhibits risk taking, and crushes creativity. It’s a tax on human achievement.
Though mindful of its evils, many people believe bureaucracy is unavoidable. Dimon remembers an outside adviser who defended it as the “necessary outcome of complex businesses operating in complex international and regulatory environments.” Indeed, since 1983 the number of managers, supervisors, and administrators in the U.S. workforce has grown by more than 100%, while the number of people in all other occupations has increased by just 44%. In a survey by Harvard Business Review, nearly two-thirds of respondents said their organizations had become more bureaucratic in recent years. Peter Drucker’s prediction that today’s organizations would have half as many layers and one-third as many managers as their late-1980s counterparts was woefully off the mark. Bureaucracy has been thriving.
Meanwhile, productivity growth has stalled. From 1948 to 2004, U.S. labor productivity among nonfinancial firms grew by an annual average of 2.5%. Since then its growth has averaged just 1.1%. That’s no coincidence: Bureaucracy is particularly virulent in large companies, which have come to dominate the U.S. economy. More than a third of the U.S. labor force now works in firms with more than 5,000 employees—where those on the front lines are buried under eight levels of management, on average.
Some look to start-ups as an antidote. But although firms such as Uber, Airbnb, Farfetch, and Didi Chuxing get a lot of press, these and other unicorns account for a small fraction of their respective economies. And as entrepreneurial ventures scale up, they fall victim to bureaucracy themselves. One fast-growing IT vendor managed to accumulate 600 vice presidents on its way to reaching $4 billion in annual sales.
Why is bureaucracy so resistant to efforts to kill it? In part because it works, at least to a degree. With its clear lines of authority, specialized units, and standardized tasks, bureaucracy facilitates efficiency at scale. It’s also comfortably familiar, varying little across industries, cultures, and political systems.
Despite this, bureaucracy is not inevitable. Since the term was coined, roughly two centuries ago, much has changed. Today’s employees are skilled, not illiterate; competitive advantage comes from innovation, not sheer size; communication is instantaneous, not tortuous; and the pace of change is hypersonic, not glacial.
These new realities are at last producing alternatives to bureaucracy. Perhaps the most promising model can be found at a company that would not, at first glance, appear to be a child of the digital age. Haier, based in Qingdao, China, is currently the world’s largest appliance maker. With revenue of $35 billion, it competes with household names such as Whirlpool, LG, and Electrolux. At present, Haier has some 75,000 employees globally. Outside China it has 27,000 employees, many of whom joined the company when it bought GE’s appliance business, in 2016.
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