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Advanced management principles; flat hierarchies; and a strong cooperation culture prepare the Scandinavian countries well for the global innovation economy – But a lack of killer instinct and importing of American management methods could undermine the Scandinavian success model, experts advise

Scandinavian management model makes good bottom lines

Af: Mikael R. Lindholm (mm@mm.dk)

04.10.09

EXECUTIVE SUMMARY

If you want a glimpse into the successful management models of the future, Denmark and the other Scandinavian countries are good laboratories to visit. Here, modern, anti-hierarchical management principles are widespread, and that leads to engaged and innovative employees, say many management experts. Today, management has handed over responsibility for the detailed planning of production to autonomous groups of employees in up to 60 per cent of Danish businesses. "The Scandinavian model means that the contact  between management and employees happens easily and quickly, so that you can quickly react to new situations," says the former director of the international service giant, ISS, Waldemar Schmidt.

Management in Denmark and most of Scandinavian is different from the rest of the world. While workers in many countries look to the manager for instruction or to report results to, the managers in the Nordic countries often seek out employees and tap them on the shoulder to hear what they are up to.

Make no mistake. This is not a euphemism for a lack of hard work, discipline or initiative. Quite the opposite. The special Scandinavian management structure creates more engaged, idea-rich and responsible employees than many other countries’ management regimes – and it releases the creativity which is absolutely fundamental for success in the innovation-driven economy of the future.

“There is no doubt – a Scandinavian management model exists which differentiates itself from the rest of the world, and which is more tuned in to the demands of the future than other management models,” says professor Henrik Holt Larsen, from the Copenhagen Business School (CBS), who researches management and is familiar with Nordic-wide research projects in management.

Many business leaders have come to the same conclusion. According to Waldemar Schmidt, former CEO of the Danish service concern, ISS, the special Scandinavian management model is built on a positive view of people and the belief that individuals can make a difference. It ensures “interestingly enough superior bottom line figures, when you compare Scandinavian companies with their American and European counterparts,” he says.

 Meanwhile, the question is whether the Scandinavian management style is coming under pressure in an increasingly globalized world, in which American management techniques often set the agenda, and where the global financial crisis is forcing businesses to get heavy handed with solutions. On the other hand, can Scandinavian management perhaps contribute to the growth and wealth of which the world is in such acute need? Below, Monday Morning analyzes the opportunities and challenges faced by the Scandinavian management model.

The Scandinavian management recipe

The Scandinavian management model is characterized by flat hierarchies, greater participation and the delegation of responsibility – and is quite the opposite to the hierarchical, authoritarian, command and control-based management style which dominates the way work is organized in many other parts of the world.

Waldemar Schmidt, who currently sits on a number of company boards and is adjunct professor of strategy and management at the CBS, illustrates the difference with reference to McDonald’s and the global service company, ISS.

“McDonald’s has 2,200 people in their head office, while ISS has 80. The difference is that, if you work at ISS, you delegate. In the Swedish service company, Securitas, they say that they have 2,000 CEOs. Every subdivision has a manager who has around 100 co-workers under them, and has responsibility for customer care, employees and economy. There are of course controls in the system, but there is no layer between managers who sit in the head office and draw up detailed questions. The power lies out with the activities of the individual. Imagine how many manuals they have to write for people at McDonald’s, and how much reporting they must have. In that type of business employees on the ground work for head office and not for the customers,” says Schmidt.

The examples are not chosen randomly. Waldemar Schmidt has conducted a research project at the Swiss management school, IMD, in partnership with the consultants McKinsey & Co., and the head hunters, Egon Zehnder, to explain how service industry companies such as Securitas and Group 4 Falck – both suppliers of security with many low educated and professional employees – have achieved international expansion, growth and products to match global success machines such as Walmart and General Electric. At the same time, they have achieved top rankings on share analysts, Stern Stewart’s, list of the companies which are best at generating shareholder value.

According to Schmidt the explanation is simple: “The best service industry companies have a very Scandinavian-based management model. They have small head quarters, few manuals, respect for individual employees and other stakeholders, and they delegate, together with placing great emphasis on training,” he says.

Schmidt’s conclusions are not isolated. Many international analysts, including leading management experts such as Harvard’s Sumantra Ghoshal, believe that the best way to create a modern, dynamic and innovative organization is precisely by establishing flat, unbureaucratic organizations, delegating responsibility, establishing autonomous project groups and to manage with the help of goals and values free from control and command – the “traditional” form of organization.

The Danish management consultants, Rambøll Management, have conducted research among 1,000 Danish companies in order to analyze the connection between organizational form and the bottom line. The result shows that the “modern” companies have a return on investment of 6.4 per cent, while the “traditional” ones have a return on investment of 2.45 per cent. And while 29 per cent of the traditionally managed companies lost money, this only happened with 16 per cent of the modern ones.

The research also showed that over 30 per cent of these Danish companies could be characterized as “modern”.

That’s no coincidence, as the Scandinavian managers want independent workers. According to the Global Competitiveness Report, the Nordic countries dominate the top of the ranking list of countries in which managers are willing to delegate authority. And, according to a questionnaire carried out at Capacent among Danish directors, 94 per cent say that they prefer the Scandinavian management model with independent employees and flat hierarchies over the traditional form of management, which only 5 per cent adhere to. See figure 1.

Scandinavian cultural power

The Scandinavian management style is deeply anchored in Scandinavian culture, which differs from the rest of the world in a number of key areas. For example, the Scandinavians have a low trust in authorities, and this has a great impact on how Scandinavian leadership manifests itself.

Managing the Danish way

Figur 1 | Forstør

"Which of the following management models do you prefer?"

Danish managers prefer delegating tasks, flat organizational structures and an informal tone. On the other hand, they implement control and supervision.

Note: 1 N=351., Kilde: Capacent.

“Scandinavian belief in equality is close to an equality ideology. We insist on being our own authority,” says Jette Schramm-Nielsen, former management researcher at CBS – now a self-employed management consultant specializing in Scandinavia and the Middle East – and co-author of the book, “Management in Scandinavia”, which features in-depth interviews with a large number of business leaders from Denmark, Sweden and Norway.

In practice, an equality approach means that employees require and expect to have a great deal of influence and independence in the work place, and that wish has been met. That is a major strength, Schramm-Nielsen points out, because it gives employees the opportunity to use their skills to the full. See article page 52.

Of course, the model has consequences for management responsibility. When command and control is out of the question, motivation and values are fundamental management instruments. As Göran Carstedt, former CEO of the furniture chain IKEA, puts it: “The challenge is to create an organization that is worthy of the employees’ unreserved engagement.”

Another thing that is special about the Scandinavians is that they are reluctant to accept control in the forms widely accepted in the rest of the world.

“If you go to Germany, people expect to be controlled, and, of course, the further south and east you go, the more they expect control. In a country like the USA, employees have to document what they are doing and the results they have achieved all the time. In Scandinavia people are almost offended if someone looks over their shoulder – it is taken as an expression of mistrust,” says Jette Schramm-Nielsen.

Scandinavian priorities

Figur 2 | Forstør

Order in which companies prioritize their stakeholders

American leaders take their point of departure in the market and put the customers first, while the Scandinavians put the employees first.

Note: 1 These orders of priorities are based on scores from the business leaders of the respective countries in the Global Competitiveness Report 2004., Kilde: Global Competitiveness Report 2004, World Economic Forum.

When this direct control and steering is ruled out, the decision making process becomes very collective and inclusive, meanwhile the organization becomes flat. When there aren’t so many managers to control the employees, then it is not a very great distance from the bottom to the top.

“It is especially marked on the factory floor. In some places you don’t have a fixed supervisor anymore, the function rotates among employees. In other places the supervisor has responsibility for up to 150 people. You don’t see that in other countries. In France a supervisor typically has five to ten men under him or her,” says Jette Schramm-Nielsen.

Stakeholder capitalism

The Scandinavian ideal of equality has its roots back in the Protestant ethic. According to the Scandinavian interpretation of Christianity, individuals have a direct connection to God. You don’t need to go via a priest, the bishop or the Pope in order to talk to God, as God is everyone’s. These ideals have had a great influence on the organization of society – not least in the job market.

The Scandinavian unions and employers negotiate towards consensus-based solutions from a position of mutual respect and dialogue. In most cases this creates greater calm in the jobs market and major, ill-timed redundancies are relatively rare. The OECD and EU have singled out the Danish employment market as the world’s best functioning, because it combines employer freedom to hire and fire with a peace of mind for the individual employee in the form of economic security and training opportunities. See also article page 58.

A focus on education helps the cooperation model to function, built upon a collective understanding that education and skills are the individual’s key to a good future and, therefore, must be freely available for all. The condition for widespread self-determination and autonomy is that employees are highly educated and that the level of enlightenment is ready to let them make the right decisions by themselves.

“The education level is the alfa and omega for the Scandinavian model – just think that, even on the factory floor, every single employee in Denmark today uses IT in their daily work. You don’t see that in many places in the world. Political parties, and by no means least the unions, should take a great deal of the credit for that,” says Jette Schramm-Nielsen.

Waldemar Schmidt completely agrees with that view:

“Without good cooperation with the Nordic trade unions – not least regarding education – the ISS and many other Scandinavian companies would never have become the global concerns they are today,” he says.

According to Jette Schramm-Nielsen, the Scandinavian companies’ shop stewards play a particularly important role in the Nordic model. Thanks to increased training, the shop stewards have gained a deeper understanding of the businesses and their condition – they read the accounts and understand the challenges – which creates an awareness of everyone being in the same boat. What is good for the company, is good for the employees. “Even where redundancies are concerned, shop stewards are involved. That is unique. In Germany, France and Spain people are still tied up in old class wars, them against us, management against employees.

Neither understands that they have a shared fate and are dependent on each other,” says Jette Schramm-Nielsen.

Waldemar Schmidt describes the Scandinavian acknowledgement of a shared fate as “stakeholder capitalism” – as opposed to the American shareholder capitalism, in which individual interests are favored at the cost of others. Both world pictures take their starting point in the market which frames wealth creation, but they have different priorities.

High-class innovation

Figur 3 | Forstør

Innovation performance, EU member states

Denmark is in the top five league in the European innovation index which consists of 29 different indicators.

Kilde: European Commission, European Innovation Scoreboard, 2008, 2009.

The Scandinavian manager will typically prioritize employees first, based on the logic that satisfied employees are productive, which benefits the owners because it creates better products, which the customers demand. The American manager will typically prioritize the customers first, because satisfied customers make the owners happy, which means they can pay the employees and contribute to society. See figure 2. And in this way the order of factors is not meaningless. These two models create very different relationships and different world views.

“The Americans aren’t so keen on unions; they would rather make savings than cooperate,” says Waldemar Schmidt. While the model brings savings here and now, he suggests that it can have repercussions later on. The companies simply lose out on those opportunities to improve their employees’ skills which cooperation with unions have traditionally given Danish companies.

 Innovation in Scandinavia

One of the greatest strengths of the Scandinavian model is a marked knowledge sharing which delivers clear advantages in an innovation-driven economy.

“We don’t keep knowledge to ourselves – knowledge is power. In many other countries it is used as a resource. If you’ve discovered something, you keep it for yourself. We jump up on the table and tell it to everyone, because we trust each other – trust is the basis for sharing with others,” says Jette Schramm-Nielsen.

This kind of cooperation is a fundamental element of innovation. According to research carried out among the largest international businesses by the Economist Intelligence Unit, the primary source of innovation is a team which cooperates on a task which the management has prioritized. And according to the Global Competitiveness Report, the Scandinavian countries have exactly a number of these innovation-promoting process strengths. When it comes to competences such as cooperation, processes, creativity, relations, and so on, the Scandinavian countries top the world rankings.

According to Henrik Holt Larsen, the Scandinavian management style means that it is easier to mobilize employees’ ideas and creativity in the development of new solutions.

“It is easier to create employee-driven innovation, partly because of the low distance to power, which means that there aren’t so many layers between organizational levels, and partly because we can live better with situations which are characterized by experiments, uncertainty and spontaneity,” he says.

Waldemar Schmidt agrees that the Scandinavian management structure liberates the power of innovation.

“The model means that contact between managers and employees occurs easily and quickly, which in turn means that you can react quickly to new situations – threats as well as opportunities. That is a clear advantage,” he says.

So, it is no coincidence that the Scandinavian countries – which on a global scale have small research budgets – according to the European Innovation Score Board, make up the European “innovation elite”.

Danish companies are still not among the highest ranked, when one compares their capacity to transform innovation to new business. Denmark is only ranked 16th in Europe com paring percentage of turnover from newly developed products.

No killer instinct

There is also a downside to Scandinavian management. Experts and researchers together point to one of the greatest problems as being a lack of killer instinct, and this can make it difficult for companies to conduct themselves in a global reality where competitiveness requires frontal attacks on their competitors.

Scandinavian values are about equality and consensus, because that is what makes the basis for cooperation and coherency. A killer instinct is build on values such as individualism and displays of raw power – two values which all the rabbit-killing courses in the world have had trouble teaching the Scandinavians. The Danes, the Swedes and the Norwegians would rather talk things through, and in the meanwhile they run the risk of being overtaken by more aggressive competitors. Therefore, in Norway they have begun to offer courses in how you behave as an authoritative manager abroad.

According to Jette Schramm-Nielsen the many disappointing Scandinavian attempts to conduct themselves in, in particular, the American market are an indication of their lack of killer instinct:

“The things which are our strengths at home, can become weakness outside. You can’t perform globally with that Scandinavian approach – you must fit in with the conditions and controls, otherwise you don’t get any respect. We are far too soft and naive. The Scandinavian model is probably the ideal model for the running of businesses in the future, but we have got to perform in a reality which is not ideal, and which demands that we take care of ourselves out in the world.”

In the long term, Jette Schramm-Nielsen does not really see any alternative to the Scandinavian model, even though many – including the Scandinavian managers themselves – regard it as difficult.

 “Of course, it would be easier if you could just say that I want it like this and like that, and then it happens without further discussion, but what you lose is, of course, all the initiative from the employees, those good ideas and that people play a role. You cannot exploit your employees’ potential if you give them the feeling that what they do or think is irrelevant. Of course, the management should also be able to cut through and stop discussion – but that doesn’t change the fact that he or she should be able to sell their decisions,” says Schramm-Nielsen.

Waldemar Schmidt is not really concerned about whether the Scandinavian model can take care of itself in a globalized world in which businesses must deal with even more employee groups that have not grown up with Scandinavian values of equality.

“We have many Scandinavian companies that have expanded globally to 40, maybe 90 countries without changing their management style. Employees in other countries quickly learn to value the way we work. Of course there is a period of adjustment, but when they experience the difference, they soon adapt. But nothing is static. The Scandinavian way of managing has always gotten inspiration from overseas and incorporated new, good ideas into our way of doing things. It will always be like that,” he says.

In this sense Jette Schramm-Nielsen is most concerned for the fascination with popular American management principles, which can sometimes be introduced in Danish companies after takeovers.

“They don’t mix well and risk undermining some of those competitive advantages that our prosperity is built upon. I think it would be very dangerous if we began to work according to American manuals.”

Henrik Holt Larsen is also concerned about the American influence.

“We might be throwing the baby out with the bathwater. We are deeply fascinated by American management thinking, even though the national conditions are so different. It means that there will be less room for us. It is difficult for Danes to be proud. It is easier to believe that others do it better. But then we risk not seeing the wood for the trees,” he says.

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