The 3 Common Characteristics of a Good Business

This article is an excerpt from the Shortform book guide to "No Rules Rules" by Reed Hastings. Shortform has the world's best summaries and analyses of books you should be reading.

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Do you think your company would do well with a decentralized organizational structure? What conditions must your company meet for this structure to be successful?

A decentralized organizational structure removes most rules and controls and gives employees the autonomy to act without approval. In the wrong hands, this system is risky and possibly costly. But, under the right conditions, this system can promote accountability and innovation.

Here’s how to successfully decentralize power, using Netflix as an example.

You Need the Right Conditions to Remove Controls

Controls keep power in the hands of company leaders—the higher someone’s position, the more power she possesses. Thus, removing controls empowers employees by giving them more freedom to take action without approvals. However, Hastings notes, removing controls comes with risk: Employees could make decisions that are costly and harmful to the company’s progress and reputation. 

(Shortform note: Research shows that most managers don’t know how to hold employees accountable for their actions—a conundrum when you’re allowing your employees to make big decisions on the company’s behalf. One way to make employees more accountable in all situations, including after large-scale costly decisions, is to set clear expectations and to put them down in writing, which prevents misunderstandings.)

For this reason, warns Netflix CEO Reed Hastings, a decentralized organizational structure can only work after you’ve used the strategies described in earlier chapters of No Rules Rules to build a corporate culture of autonomy and accountability. Let’s look at each of the conditions you need to have to successfully lead by giving relevant information. 

Condition #1: A High Concentration of Talent

The authors assert that the reason that most companies lead with control boils down to a lack of trust in employees’ skill and judgment. Senior leaders have presumably worked their way up and earned the trust to make important decisions, while lower-level employees typically have less experience and thus present a higher risk. Furthermore, in companies that don’t have the same level of transparency as Netflix, employees may not know information critical to making informed decisions.

(Shortform note: While senior executives typically make the big decisions in a control-led company, they aren’t always the right people to make the best decisions—especially if they’re more of a boss than a true leader. For example, “positional leaders” (those that John Maxwell describes in The 5 Levels of Leadership as having a job title but no real influence) might be obsessed with holding on to power, and may thus make self-serving decisions instead of thinking about the team and the company.)

By contrast, Meyer explains that if the company has developed a high concentration of talent, then every employee should be deserving of the trust and freedom to make decisions without oversight or controls. In the absence of controls, leaders need only provide enough relevant information for high-performing employees to make independent decisions. 

Building Trust Through Indoctrination

Not many companies have the level of talent that Netflix has, so it may not be so easy to trust employees to make decisions without oversight. 

Jim Collins says that another way to develop a strong sense of trust is through indoctrination. In Built to Last, he describes how some companies ensure that new hires are the right fit for their “cult-like culture.” Through orientation seminars, company songs and cheers, insider-only language, and socialization among employees, companies align new hires tightly with the corporate philosophy. 

The objective isn’t to turn these new employees into unthinking robots, but to empower them to think for themselves while strongly adhering to the company’s core philosophy. When companies see that employees are sufficiently indoctrinated, they give these employees more operational autonomy.

Condition #2: Emphasis on Innovation Over Error Prevention

Meyer explains that in some industries and organizations, controls are necessary to ensure safety and accuracy. For example, vehicle manufacturers must lead with control to guarantee that their products are safe and functional. 

On the other hand, if the company’s success depends more on adapting and staying relevant in a changing market, then leading by giving enough information is an important way to promote innovation.

(Shortform note: Meyer makes a clear distinction between companies that should be led by control and those that shouldn’t: Companies that need controls are those that rely heavily on safety and accuracy, while companies that need relevant information are those that rely on creativity and innovation. However, some creative companies may only appear as if they’re leading with relevant information, when in fact they have more abstract, self-imposed controls in place such as profits and shareholder expectations. In The Innovator’s Dilemma, Clayton M. Christensen argues that these hidden controls reveal themselves when creative companies try to pivot but are unable to because the self-imposed controls prevent them from doing so.)

Condition #3: A Loosely Coupled Organizational Structure

In software engineering (which is Hastings’s background), there are two ways to design systems: 

1) In a tightly coupled system, Hastings writes, the various components are interconnected and, as a result, you can’t change one thing without adjusting everything else. In a company, this often means that the CEO leads by control, making decisions that are carried out by the various departments. If one department has an issue, that department manager has to discuss it with the CEO so that the rest of the departments can adapt accordingly. If you want to lead your team by giving relevant information in a tightly coupled organization, by definition you can’t change the structure of your team without reforming the approach of the entire company. While this limits innovation, it allows strategic changes to be uniformly implemented throughout the company.

How to Modify a Tightly Coupled Organization 

One possible way for established companies to get around a tightly coupled system is to create a spin-off organization that has a different structure more suited to handling innovation—as long as it doesn’t directly compete with the parent company. 

In The Innovator’s Dilemma, Clayton M. Christensen writes that having this smaller company has two advantages:

First, the smaller company can celebrate little wins that the larger company would likely ignore; these wins drive motivation, which then leads to bigger wins.

Second, a smaller company has more freedom to invest in new ideas in the face of disruptive innovations, unlike larger companies that typically manage their risks by taking a wait-and-see approach to big changes.) 

2) In a loosely coupled system, Hastings says that few components are interdependent, which makes it easier to change some aspects of the system without impacting the rest. In an organization, this means that lower-level managers and employees can make decisions and resolve issues without concern that their actions will have repercussions in other departments. You can only lead by giving relevant information in a loosely coupled organization. 

Netflix is clearly a loosely coupled company, with its project-led model, dispersed decision-making, and few control processes. As a result, employees enjoy more freedom, departments have more flexibility, and decision-making and progress move more quickly throughout the organization. However, if the company wants to change its strategy, the loosely coupled structure makes it more difficult to keep the entire organization aligned in that shift—and that alignment is critical to successfully leading by context. A loosely coupled organization is still the better approach for innovative companies, but leaders must take care to establish alignment. 

Factors That Lead to Misalignment in a Loosely Coupled System

Hastings reminds leaders to establish alignment in an organization with many independent parts, but he doesn’t name specific areas to monitor for alignment. Experts say that you should keep a close eye on these three factors that lead to misalignment:

Leaders don’t understand the importance of alignment. Leaders may be too focused on their own silos without paying attention to how their teams are part of a bigger picture.

There’s no one to oversee all the components of the organization. While the CEO is usually in charge of ensuring alignment across the board, loosely coupled organizations are often too complex for one person to handle. With the number of employees and business lines as well as different expectations from each group, a loosely coupled organization needs a strategic leadership team in place.

The different components are so focused on their own day-to-day activities that they don’t give much thought to the organization’s direction and purpose as a whole. 

Condition #4: Company-Wide Alignment 

Think of your company’s evolution as a journey with your staff. When you lead by giving relevant information, you allow your employees to find their own routes—and your job is to ensure that everyone knows which direction to go. Meyer explains that the CEO provides relevant information to the company’s senior managers about the general direction and values of the company. In turn, those leaders use that information to give their teams another layer of information that homes in on their specific responsibilities. The process continues down to the most junior employee. 

Employees can only make independent decisions in the best interest of the company’s mission and strategy if they have the right information—and when they make poor decisions, managers should refrain from blaming the employees and instead reflect on how they failed to provide adequate information and created misalignment.  

How to Create Alignment  

To be aligned means that all elements of a company—from decisions and actions to goals and even the office layout—reinforce each other. Without alignment, forces will constantly oppose each other, slowing down progress or causing a company to stagnate. 

To make sure that you have company-wide alignment, Jim Collins recommends these three actions in Built to Last:

1. Emphasize the company’s core values. When everyone has an understanding of the company’s philosophy and objectives, it’s more likely that they’ll make decisions that are aligned. 

2. Look at the big picture. While employees may be free to generate and execute ideas, they should consider whether these ideas make sense within the existing company structure. Projects, goals, and policies should also reinforce each other. For example, if your company’s goal is to prioritize science-based innovation over keeping shareholders happy, make it a policy not to let investors interfere with scientists’ work.

3. Correct misalignments right away. Agile companies go through many changes—setting new goals, introducing new products, restructuring—but the one thing that shouldn’t change is their core philosophy. Stay vigilant and eliminate misalignments when you notice them. For example, if you value teamwork, eliminate incentives that reward individual performance.
4 Rules for a Decentralized Organizational Structure

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  • How Netflix achieved massive success in a short period of time
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  • Why Netflix fires adequate employees

Hannah Aster

Hannah graduated summa cum laude with a degree in English and double minors in Professional Writing and Creative Writing. She grew up reading books like Harry Potter and His Dark Materials and has always carried a passion for fiction. However, Hannah transitioned to non-fiction writing when she started her travel website in 2018 and now enjoys sharing travel guides and trying to inspire others to see the world.

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