PDF Summary:The Age of Agile, by Stephen Denning

In The Age of Agile, management expert Stephen Denning challenges traditional business practices, arguing that today's business environment is more unpredictable, customer-driven, and complex than ever. As such, it demands a more agile approach: Companies must continuously innovate to create value for their customers.

Denning offers a roadmap that organizations can use to become more agile, responsive, and innovative. By adopting these approaches, Denning asserts, businesses can improve their chances of success in an increasingly challenging marketplace and even revolutionize their industries.

In our guide, we'll cover the challenges modern companies face as well as the agile strategies and managerial principles Denning recommends. Throughout, we'll supplement Denning's advice with recommendations from other business experts while providing alternative perspectives on some of his arguments.

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Measuring Agility

In considering how to make your company more agile, a good first step is figuring out how agile your company already is, and in what areas. Business experts recommend several metrics for assessing your agility.

• Time to market: How much time does it take for your company to bring a new product or service to market?

• Development cycle: In developing new products, how long does it take to create each new iteration?

• Customer satisfaction: As we'll see throughout this guide, satisfying customers is a core goal of agile companies. How excited are your customers to use your product?

• Employee engagement: In an agile organization, employees are empowered to generate ideas and autonomously make decisions. Measuring employee engagement can indicate your company's agility.

Part 2: Agile Strategy

According to Denning, companies can only thrive if they set the correct priorities and goals in response to economic challenges, which allows them to make swift changes as necessary. In this section, we'll cover three things Denning says companies should prioritize: customers, the future, and continued innovation.

Strategic Principle 1: Prioritize the Customer

Denning argues that the customer should be the company’s highest priority and that firms should focus on delivering value that excites their users. This challenges traditional management practices that prioritize profit leading to investor return over customer satisfaction. He stresses that profit is a by-product of thrilling the customer, not a separate or conflicting goal.

Denning explains that this shift requires companies to change their goals, structures, and processes to be customer-centric. Additionally, top management must cultivate company-wide enthusiasm for bringing joy to customers by exceeding their expectations.

Knowing how to bring joy to customers requires precise information about the needs they want met. Denning recommends constantly interacting with customers to gain feedback that will inform how you tailor products and services to their preferences. This process not only improves the final product but also motivates team members, who may find it rewarding to provide real value to others.

For example, online shoe retailer Zappos re-aligned their business to optimize customer service. To do so, they moved their headquarters to a city where they could afford their own in-house call center, rather than outsourcing. They removed time limits on service calls, staffed the call center 24 hours, and empowered representatives to make decisions to please the customer, even if they resulted in a financial loss for the company. This commitment to customer satisfaction, and customers’ many positive experiences with the company, has earned Zappos a loyal following.

Who Comes First: Customers, Employees, or Shareholders?

In arguing that companies need to put their customers first, Denning is wading into a long-standing debate over which stakeholders a company should prioritize: their customers, their employees, or their shareholders. Here, we'll take a look at the other two perspectives in this debate, employee first and shareholder first.

Employee first: The position that companies should put their employees first has gained traction recently with endorsements from prominent CEOs such as Richard Branson of Virgin Group and Craig Jelinek of Costco. The theory is simple: Whatever value your company produces—whether for customers or shareholders—will be produced by the work of your employees. Therefore, cultivating a staff of highly motivated, loyal, engaged, and hardworking employees will generate the most value in the long run. Furthermore, loyal employees who take pride in their work can become ambassadors of your brand. Employee-first companies tend to focus on job-security, high compensation, and company culture.

Shareholder first: The default position for much of corporate America over the last half-century has been that companies should prioritize shareholders. The economist Milton Friedman popularized the idea in the 1970s,arguing that shareholders are the owners of the company and CEOs are their employees. Therefore, the CEO's first responsibility is to their employer, the shareholder. Proponents of this position also argue that shareholder value is easier to measure than customer satisfaction or employee loyalty and thus provides clearer metrics as to how the company is doing. Shareholder first companies tend to prioritize efficiency and cost-cutting.

Strategic Principle 2: Focus on the Future

Furthermore, Denning argues that it’s not enough to fulfill existing customer needs; companies must think forward and aim to fulfill needs that will emerge in the future. Business leaders must anticipate new market opportunities and imagine products that will someday become indispensable. This approach leads to high growth and profits by creating value in uncontested market spaces, rather than competing in existing markets.

For example, when meat-alternative company Impossible Foods was founded in 2011, the company didn't cater to existing vegetarian markets but instead envisioned a future where meat-eaters may choose plant-based options for environmental reasons. Thus, they were able to create an entirely new market with plant-based foods that mimicked the flavor, texture, and cooking properties of meat.

How to Identify Possible Future Markets

While Denning calls on companies to identify future markets, business experts clarify how you might identify these markets.

1) Look at solutions found in other industries. If you’re trying to solve a specific problem or meet a specific need, ask yourself which other industries might deal with this same problem or need. Then, research how those industries have addressed it.

2) Identify lead users. Find people who are either trying to solve or have already solved the problem your company aims to solve for customers. Then, learn from their solutions. For example, mountain bikes were originally invented by hobbyists who optimized their bicycles for riding off-road, developing innovations like thicker tires and heavier frames. Manufacturers noticed and began mass-producing these innovations for a growing new market that they otherwise might have overlooked. Business experts recommend that you find such “lead users” through networking. Look to early adopters, niche communities, and others who are highly invested in the problem your company aims to solve.

3) Forecast demographic shifts. Populations change over time. By paying attention to trends in population growth, aging, and migration, companies can identify which markets may have room for growth. For example, as people in developed nations live longer and have fewer kids, elderly consumers are becoming a larger part of the population, leading to changes in customer preferences.

Strategic Principle 3: Invest in Capacity and Innovation

To create products and services that fulfill future demand, companies must continuously innovate. Therefore, Denning argues, companies must invest heavily in building capacity for research, development, and production. He calls for companies to invest in their staff of engineers and developers and to retain expertise.

Denning explains that many companies fail to invest in developing their innovative capacity because they prioritize shareholder value instead. As a result, they pursue short term gains at the expense of long-term, capacity-building investments.

How Much Should Companies Spend on Research and Development?

One challenge of investing in long term capacity is determining how much to spend. Since your firm may not see any returns on these investments for years to come, it's difficult to know if you're spending the right amount. However, understanding typical research and development (R&D) spending in your industry can give you a useful point of comparison.

A 2018 study of the world's 1,000 largest publicly listed companies found the following median R&D expenditures (expressed as percentages of revenue):

• Software: 19.35%

• Semiconductors: 14.5%

• Pharmaceuticals: 13.3%

• Internet Retail: 10.95%

• Hospitality: 8.7%

• Electronic Equipment: 7.4%

Denning critiques two investor-centric practices in particular: stock buybacks and outsourcing. Let’s explore each practice and their drawbacks.

Why Stock Buybacks Are Detrimental

Denning explains that the pursuit of investor returns often leads firms to buy back their own stock. This pleases shareholders because it artificially inflates their stock prices by reducing the number of shares available, which boosts earnings per share. However, Denning argues that this practice only diverts company assets from growth and innovation, weakening the company in the long term. As a result, the firm’s capacity to create real value diminishes, leading to a negative and self-reinforcing cycle where more buybacks are needed to maintain stock prices, further eroding the company's future prospects.

(Shortform note: While many agree with Denning's position, defenders of stock buybacks argue that they're not as detrimental to a company as sometimes portrayed. They contend that companies mainly buy back stock when they have excess capital but have exhausted other investment opportunities. In other words, stock buybacks don’t interfere with investment in growth and innovation. Furthermore, defenders argue that stock buybacks allow capital to be allocated more efficiently throughout the economy. If shareholders are willing to sell their shares back to the company, it probably means that they’re planning on moving their money to better investment opportunities, redirecting capital where it would be most impactful.)

Why Outsourcing Is Detrimental

Furthermore, Denning argues that the pursuit of investor return often encourages companies to focus narrowly on cutting costs to widen profit margins. Like shareholder buybacks, this practice prioritizes short-term gains at the expense of long-term sustainability.

This is particularly evident in the case of outsourcing, where companies delegate parts of their business to another firm, often in countries where the cost of labor is cheaper. Denning argues that outsourcing can lead to an irreversible loss of knowledge and capability—companies can only innovate processes that they themselves participate in or have direct knowledge of. Once those processes have been taken over by other firms, the company is no longer aware of what goes on behind the scenes. This undermines their ability to improve on those processes, their products, or their services through innovation.

(Shortform note: It’s worth noting that there are potential benefits to outsourcing. First, companies can free up time and money for more important projects by outsourcing functions that other firms do more cheaply. This could allow them to invest even more in the functions that are most important to their business. Furthermore, offshoring jobs to another country gives companies access to a global talent pool, brings jobs to developing countries, and can even strengthen international ties between nations.)

Part 3: Agile Management

Denning argues that to thrive, companies must ensure their management—the organization of teams, decision-making, and reporting structures—is as agile as their strategy. Denning highlights three important principles of agile management: small, self-managing, multi-disciplinary teams; networked coordination between these teams; and guidance from upper management. Let’s explore each.

Managerial Principle 1: Small, Self-Managing, Multi-Disciplinary Teams

Denning argues that companies can continuously innovate their products and services by organizing their workers into small, self-managing, multi-disciplinary teams. These small groups are organized around a single project—such as solving a problem with their current product or developing a new feature—and are granted wide latitude in selecting their methods for achieving these goals. How far that discretion extends will vary from company to company, but in general, the goal is for the team to move quickly without waiting for their decisions to be approved.

(Shortform note: While Denning focuses on the advantages of agile management, our commentary throughout this section will highlight some potential drawbacks. For starters, some business experts caution that transferring from one management style to another can take a lot of effort. Furthermore, agile management’s emphasis on speed can result in a lack of documentation, which results in fewer records of company work. This can lead to a lack of transparency and make it difficult to track progress.)

Denning lists four benefits to these types of teams: smaller tasks, faster development cycles, more independence, and more suggestions and ideas.

1) Smaller Tasks

Denning’s approach allows firms to break down large, complicated problems into smaller, more manageable tasks. Developers can thus test out targeted solutions without being encumbered by the complexity of working on the entire product at once.

(Shortform note: Breaking tasks down into smaller chunks can sometimes result in poorer coordination. If teams begin working in different directions, they may produce components that aren’t compatible with each other. They may also experience project delays if dependent steps are ready at different times.)

2) Faster Development Cycles

Focusing on a smaller task allows teams to move more quickly through the iterative cycle of development, accelerating their research. By working in short cycles and focusing on small, incremental improvements, these teams can constantly generate value for customers.

(Shortform note: While faster development cycles can improve research velocity, they may also make it more difficult to plan ahead for the long term. Because each research cycle may have different goals and problems, it will be harder to allocate resources in advance, possibly resulting in projects that are over- or under-resourced for their goals.)

3) More Independence

By working autonomously with little need for verification and approval, these teams can adapt more quickly to new information and customer feedback. Denning argues that traditional top-down management slows teams down by requiring decisions to be ratified and verified from on-high.

(Shortform note: Increased independence for teams can also result in scope creep, a problem where projects drift beyond their original purpose or mandate. This can cause projects to run over budget and behind time. It can also lower quality: When teams try to add too many new features, they run the risk of spreading themselves thin and executing the core project poorly. Scope creep can happen any time teams aren't held accountable to staying within the boundaries of their project.)

4) More Suggestions and Ideas

By eliminating the need for top-down planning, teams are free to leverage innovative ideas from all levels of the organization. When ordinary workers can make suggestions and offer their perspectives, this creates a wider pool of ideas for future innovation.

(Shortform note: While including more people in the conversation can bring in fresh perspectives, the collaborative nature of agile management also requires a lot more time spent in meetings and discussions. If these conversations aren't productive, this could end up wasting workers' time.)

Managerial Principle 2: Coordination Between Teams

Though working independently, these small teams must still coordinate their actions to work together toward the company's larger goals. Denning recommends that companies allow their staff to collaborate across teams in an interlinked network that shares information and resources directly through regular communication. This not only gives team members faster and easier access to resources and information to complete their tasks, but also gives them a broader perspective of how their actions fit with those of other teams into broader company goals.

Denning argues that companies must break down silos between teams to facilitate this level of coordination. When teams are cut off from each other, they end up with blind spots and outdated information, which leads them to work incompatibly or even at cross-purposes. To prevent unproductive siloing, Denning recommends widely sharing information to keep everyone informed on company matters such as overall strategy, the activity of other teams, and new developments that might impact the company. He also suggests bringing staff together into common spaces and periodically exchanging staff between teams. This allows staff members to informally share information that may be relevant to their roles.

How To Increase Information Sharing Across Teams

Business experts have come up with several additional strategies for breaking down silos between teams—let’s explore three.

1) Create central repositories of information that can be broadly accessed or contributed to. These could include tips and tricks, contact lists, internal reports, customer research, or anything else that might be useful to more than one team. Repositories allow for frictionless exchange of information because they can be accessed at any time without having to set up a meeting.

2) Identify company experts on certain topics and encourage others to refer to them as needed. This will allow members of other teams to benefit from their subject expertise and encourage cross-team communication.

3) Hold regular meetings between team leaders to identify interdependencies and areas of overlap. This will help team leads see how their work fits together into broader company goals and allow them to identify opportunities for collaborating or exchanging resources. In particular, experts recommend holding retrospective meetings after projects have been completed. During these meetings, all stakeholders should share information on how the project went and what could be improved next time.

Managerial Principle 3: Facilitation from Upper Management

While this may all sound like a demotion for upper management, Denning contends that company leaders play an enormous role in an agile organization. Rather than managers, they must become facilitators of a networked, collaborative environment. Denning highlights two ways that upper management can achieve this.

First, upper managers must set the ground rules for how the small teams operate. These parameters define their purposes, discretionary resources, decision-making authority, and channels of coordination with others. This allows teams to move independently without stepping on each others' toes, duplicating efforts, or working in incompatible directions.

Second, managers must set the tone for their company's culture. Denning argues that business leaders foster company culture by showcasing and reinforcing core agile values, such as bringing joy to the customer, collaboration, and initiative.

How to Facilitate an Agile Organization

Dennings says agile managers are responsible for setting ground rules and building company culture—but how should you go about these tasks? Let’s explore advice from other business experts:

Ground rules: To set effective ground rules, business experts emphasize the importance of thinking in systems—seeing how all the small moving parts of your organization coalesce to form the bigger picture. To think in systems, consider the multiple factors that influence outcomes, and map out the organization and its available resources. This helps you ensure more effective collaboration. Experts also recommend regularly collecting employee feedback and periodically revising rules as needed. This can help you address your own blind spots as you set ground rules for your teams.

Company culture: Business experts explain that to build a company culture, you must dedicate company time and resources to it. (This may sound obvious, but it’s often neglected.) For example, you could facilitate team-building activities, recognize employees for their performance, or foster one-on-one relationships between employees. Experts also emphasize the role of transparency in company policy and decision-making. The more employees feel they understand what's going on, the more they’ll trust the company and its leaders.