The Firm of the Future

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In the world of the firm, something is changing. It’s not that your local bookstore went out of business. Or that your taxi driver now rates you on a 5-point scale. Or that anything can now be outsourced, allowing even the smallest firms to rent capabilities on demand. It’s more profound than these.

The prevailing paradigm that has underpinned business for the past 50 years is under review. The simplest version of that paradigm is that firms exist first and foremost to deliver returns to their shareholders’ capital—and the sooner they deliver it, the better. We will describe the challenges confronting this paradigm. But the first question we asked as we observed the changes was this: Is such a shift unusual? Has the idea of the firm been consistent over time, or has it changed before?

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What we learned from looking back was that, similar to other human endeavors, the idea of a business has evolved slowly but profoundly through a series of what we can now see as definable eras: periods when particular strategies, corporate forms and styles of management became the dominant norm. We have observed five distinct eras since the industrial revolution. These eras include the current period, which we call the “shareholder primacy” era.

Transitions between eras play out over decades. The edges are fuzzy and often become clear only in hindsight. Some elements of the previous era remain in place, while others evolve into something quite different. The shareholder primacy era, for example, retained and enhanced several features of the previous period, including the importance of professional managers and the pursuit of scale to achieve leadership economics. But companies in the current period refocused on their core businesses, shed noncore assets, outsourced more and more functions, and made their remaining assets sweat harder. That focus, combined with a high rate of mergers and acquisitions, fostered increasing concentration within industries. CEOs and management teams, often holding significant equity stakes designed to align their interests with those of other shareholders, dedicated overwhelming attention to delivering shareholder returns. The ones who succeeded earned substantial rewards.

Meanwhile, many younger employees, who now form the largest generational cohort in the workforce, are increasingly skeptical about corporate career paths. Some prefer the gig economy of Uber, TaskRabbit or Amazon’s Mechanical Turk. Others join corporations but plan on staying for only a few years. Though we can’t yet know how this generation’s work lives will play out, many of its members today place a higher value on new learning and new experiences than on traditional incentives such as moving up the corporate hierarchy.

What will be different about the firm of the future?

Our experience with clients in many industries around the world points to five emerging themes for leadership teams. In each area, we see many examples of change today, but we view these merely as green shoots compared with what may come next:

  1. Scale and customer intimacy
  2. Professional managers vs. mission-critical roles
  3. Assets vs. ecosystems
  4. Capital gets a reset
  5. Engine 1, Engine 2.
Explore the Firm of the Future

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