This is the world that Douglas McGregor envisioned.

I will venture the prediction that we will succeed in increasing our utilization of the human potential in organizational settings only as we succeed in creating conditions that generate a meaningful way of life. . . [ Joseph] Scanlon's lasting contribution is his recognition-- now effectively demonstrated in action--that one cannot successfully tackle this central task of management with gimmicks or procedures or programs. The real task of management is to create conditions that result in genuine collaboration throughout the organization. To create such conditions is to create a way of life. This is the central conclusion to which the findings of social science are pointing today. (" The Scanlon Plan: Through a Psychologist's Eyes," Leadership and Motivator, MIT Press, 1966, pp. 140-141)

Douglas McGregor would love to have lived today, for the old saying that necessity is the mother of invention rings true. All of his passion for creating a more human organization would have been, as he predicted, more necessary and, therefore, more achievable. In his day, managers could ignore his fundamental message. Paying attention to the human side of management simply wasn't a primary requirement for success in his day. Large, bureaucratic organizations that mass produced goods could treat their countless workers as interchangeable parts in a mechanistic system.

Today, however, McGregor cannot be ignored. Our age of technological dazzle has led to a paradox: the networked economy and ubiquity of computers have given companies a more natural quality than ever before. They are no longer built as impersonal machines with predictable results, but emerge as living, unpredictable entities with organic qualities. And as such, companies are finding that their enduring source of competitive advantage rests within their human capital. In his work, McGregor anticipated such a shift in working conditions--not necessarily because he was so technologically prescient, but because he recognized that as the world became more complex, the importance of releasing human potential at every level of the organization would emerge as the most appropriate working model.

McGregor stressed the fundamental importance of dealing with the human side of enterprise. Managers had to see their employees not as cogs in the machine, but as living beings with individual goals. This was not, in his view, a limitation, but a condition that opened up countless opportunities. When organized properly, groups of people working together could realize their aspirations in a far more powerful and deep-rooted manner than they could have imagined. Those leaders who saw these opportunities and made the bold organizational choice to realize their potential, both individually and collectively, would leapfrog anyone with a more traditional mindset.

Since McGregor laid out his vision of this humanistic workplace more than three decades ago, his message has become far more resonant. The nature of work today makes McGregor's theories more relevant and necessary than ever. The technology that he anticipated has changed the landscape in ways that make the human element even more important than he probably had dreamed. In fact, the enormous spread of technology into every facet of business life has had the ironic impact of making the humans who run these tools more critical than ever. Consider the changes in business today that are discussed next.

Today virtually everything that a company delivers to a customer is unique. What were once commodities have become discrete items produced for individuals--at the scale of mass markets. Levi Strauss, for example, now offers personalized jeans to its customers. Individuals can walk into designated stores, get measured by employees, and have the company produce a pair of jeans that meets their individual body shape. Dell Computer, one of the best-performing companies of the past decade, attributes much of its ability to outpace its opponents to its radically different business model. Unlike most computer operators that mass produce huge batches of machines that are then sold by retailers, Dell grew by taking individual orders for computers over the phone, and eventually over the Internet. Factory workers then created the individual machines, which were shipped directly to consumers. This personalized approach gave the company a huge advantage in its inventory turn and resultant cost of capital, and built customer loyalty through the individual's sense of ownership of their PC. In each instance, these companies have used existing technology to produce a unique, personalized product experience for each customer.

Yet computers, which can personalize products, cannot humanize them. For that you need humans. With every transaction, people become more important in the process. That's because the ability to customize a product to the individual makes the relationship with the customer the key transaction. Gathering information, and above all developing trust, have become the key source of sustainable competitive advantage. The smartest companies today recognize this process and leverage the human relationships that are fostered by new technology. In their books and speeches, authors/ consultants Donald Peppers and Martha Rodgers describe a "One-to-One" world in which companies grow not by selling their goods to a larger audience, but by learning how to sell more products and services to existing customers. This simple turn of business thinking is predicated by companies' increasing ability to compile sophisticated information on what their customers need, and then respond nimbly to this data. Hotels can tap into the client database, for example, to find new services to sell them, just as other service companies can brainstorm new products to add to their mix. Loyal customers to web sites such as Amazon. com now receive customized recommendations for books and CDs based on their personal buying history. Again, the human relationship serves as the platform upon which these companies deliver greater value.

The power is shifting in commercial relationships as customers continue to be taught that they can have it their way. Not only are the best companies using the web and other technologies to have continuous, anytime, anyplace dialogues with their customers, but a growing number of Once upon a time, producers set the rules of the game. Ma Bell let customers choose what color phone they wanted--as long as it was black. Car manufacturers introduced this year's model to eager masses of aficionados. And hotels, airlines, or other large service providers dictated the prices it would offer to customers. Today all these offerings are up for grabs. The breakup of AT& T is a sign of the explosion of choices available to consumers today. Amidst the cornucopia of portable, personalized, stylized, and miniaturized products, a simple black phone's value today rests solely in its status as a retro collectible. Consumers can also choose from not only thousands of phone lines, but perhaps millions of variations of service from countless carriers. Moreover, automobiles are now cranked out in smaller, more customized batches to worldwide consumers. And in the area of prices, consumers today are turning to web auctions to f ind, and often set, the lowest conceivable prices for services that were once non-negotiable.

Again, such changes place ever greater importance on the people of an organization. As goods and services become ever more commoditized, then the human experience backing them rises in value--and the consequences of failing to deliver a satisfying transaction escalate. Consider the explosion of "spite sites," web sites detailing the poor service people have received from individual corporations. When a recent customer was unhappy with his experience at Starbucks, he undertook what became a nationally-known campaign of complaint against the company. Other dissatisfied customers have created web sites and campaigns against companies like USAir or Apple. Virtually every large company today, in fact, finds itself targeted by once-loyal customers who turn critics when they receive poor human response. These customers are not angry with the products--but with the lackluster human experience they have come to expect.

In today's Internet world, personalization matters more than ever. Web companies today are finding that they are competing on the unique experience that their digital presence delivers. Companies that provide an environment for people to share their passion enjoy returns beyond any reasonable expectation. In fact, they find that because experience can be digitized and thus easily replicated, the ability to produce relationships fuels its own success. e-Bay CEO Meg Whitman attributes her company's success to a "network effect" in which the quantity and caliber of the conversation taking place on the company's boards becomes a lure to more consumers. The sheer human interaction that e-Bay hosts becomes a self-reinforcing foundation of its success. Providing a replicable site for human energy has become a source of competitive advantage.

As the distinction between products and services becomes a blurry, almost nonexistent line, the importance of loyalty becomes ever more important. People rarely get emotional about software--but they do about a company's prowess at solving their problems. The ability of companies to support their employees as they maintain human relationships with customers becomes the core value for growth. In everything from e-mail service to other goodies, web merchants who recognize the value of personal data are giving away physical goods to customers who will share their personal information. They recognize that the blurring of products and services makes the underlying human transaction ever more critical.

Customers increasingly look to companies as trusted sources of authority that will help them make the right choices. When children, for example, begin to derive as much pleasure from designing their doll as playing with it, that places an increased premium on the ability of the people in that doll-maker's company to provide a welcoming experience for making those choices.

In today's economy, technological prowess is mere table stakes. At a time when any significant technological lead can be quickly reproduced, the race is won by those companies that are willing and able to constantly reinvent what they produce. Look at how Amazon. com has adopted the auction format of e-Bay. As the first company to conduct consumer auctions for collectibles on a grand scale, e-Bay became one of the fastest growing and popular web sites ever. As noted above, it leveraged its popularity into higher visibility, which in turn helped its stock price and drew greater crowds to the site. And yet, it still found itself with a new competitor: Amazon. com, which launched its own auction feature, becoming an instant player that could give e-Bay a run for the money. Amazon was able to leverage its community of on-line buyers into a viable competitor to e-Bay soon after the launch of the auction feature.

Yet machines don't innovate--people do. It takes an inspired and committed workforce to produce innovative products. How could Apple Computer revive itself from a near-death bed? By introducing a line of better designed computers--the iMac--that captured enormous market share. In so doing, the company changed consumer's relationship to their computers--turning them once more from commodity boxes to unique expressions of taste--while lifting the company's fortune and stock price. CEO Steve Jobs, the man behind the company's turnaround, recognizes the critical need for a corporate culture that enables such personalized technology. These products do not come from compliance, but from a culture where people have passion to express themselves.

Organizational life has become far more complex, organic, and un-predictable than before. Today's organization bears little resemblance to the top-down, bureaucratic, hide-bound, rule-driven hierarchy that emerged during the first two-thirds of this century. The largest and most significant companies today grow and shrink in the time it used to take automakers to produce a new line of cars. Scores of independent contractors function as free agents who skip from company to company rather than work for one organization for life.

These virtual, shifting organizations are bound more by trust than authority. In his book, Trust, writer Francis Fukymaya argues that trust functions as a form of social glue binding people and organizations together. He recognizes that the digitized world amplifies the importance of trust as a vital resource among groups of people in common enterprise. As greater numbers of employees work in far flung locations, and companies devolve into virtual networks of suppliers and independent contractors, the evanescent glue of human trust becomes ever more important as a business imperative. Trust differs radically from authority, which McGregor found a shaky source of power in any organization:

Some of our most troublesome problems in managing the human resources of industry in the United States today are directly traceable to the assumption that authority is an absolute and to inappropriate attempts to control behavior which flow from this assumption. (The Human Side of Enterprise, p. 21)

In the same piece of writing, McGregor elaborated on authority's flaws in an increasingly decentralized world.

Authority, as a means of influence, is certainly not useless, but for many purposes it is less appropriate than persuasion or professional help. Exclusive reliance upon authority encourages countermeasures, minimal performance, even open rebellion. The dependence--as in the case of adolescent in the family--is simply not great enough to guarantee compliance. (The Human Side of Enterprise, p. 26)

Wired magazine editor Kevin Kelly says we have seen all the changes that technology will create, and that our biggest challenge will be catching up with the people side. In other words, we've gotten better at everything technological but have made less substantial strides in the people arena. Individuals now have the ability to conduct global research from their desktop. Cutting edge financial companies have the ability to slice and dice databases of consumer information to simultaneously offer millions of different individuals credit cards that are customized to their needs and credit profiles. Affinity groups around passions and vocations can form instant networks over the web. And yet, few people have figured out how to manage the real human changes that these technologies bring about.

And that's where Douglas McGregor comes in.

McGregor was above all a futurist. He foresaw the end of a mechanist view of management long before people were ready to hear such a viewpoint. Prior to his thinking, the prevailing view toward organizations was one of a machine: driven from the top, ruled by authority, predictable outcomes from fixed inputs, and staffed with interchangeable people.

McGregor challenged managers to think of human organizations more as a biologist than a mechanic. As he wrote in his book, The Human Side of Enterprise,

Managerial practice appears to reflect at least a tacit belief that motivating people to work is a "mechanical" problem. There are certain similarities between this view of man at work and Newton's Laws of Motion. To a considerable degree, man has been perceived to be like a physical body at rest. It requires the application of external forces to set him in motion--to motivate him to work. Consequently, extrinsic rewards and punishments are the obvious and appropriate "forces" to be utilized in controlling organized human effort.

He believed that such machine metaphors inhibited us from finding a better and simpler way of building more effective organizations. In that same essay, he continued:

He is an "organic" system, not a mechanical one. Inputs of energy (sun, food, water, etc.) are transformed by him into outputs of behavior (including intellectual activities and emotional responses, as well as observable actions). His behavior is influenced by relationships between his characteristics as an organic system (I) and the environment ( E). Creating these relationships is a matter of releasing his energy in certain ways rather than others. We do not motivate him, because he is motivated. When he is not, he is dead. This is the sense in which the behavioral scientist distinguishes between an organic and a purely mechanical theory of human nature.

McGregor's belief in the manager as a gardener, or system architect, allowed people to take a radically different approach to work. Leading self-organizing systems enabled people to cultivate rather than direct change; to enable people to realize their potential rather than "fix" them. People are living organisms and communities of work are capable of renewal, adaptation, and change, and can't be fixed. McGregor recognized that real change happens only when a community of interest decides it wants to be different and the obstacles to renewal are removed.

He believed that as in any organic system, the more that you broke the system into its subparts the more complicated the system became. As we have learned in science, rarely are cause and effect apparent in a complicated system. Overly simplified models that attempt to give easy answers to complex problems just distract us and delay real, meaningful efforts to identify a better path.

He thought that every management interaction was a complex challenge that involved a wide array of factors, such as the personal variables of the leader/ manager (attitudes, assumptions about what works, habits, beliefs, values, experiences, prejudices, etc.), the characteristics of the followers (habits, beliefs, experiences, education, values, prejudices, self-confidence, etc.) and the political/ social milieu in which people work (work structure, policies, economic environment, geographic location, espoused values of the organization, perceived mission, etc.). "Perhaps the most general statement of the potential contribution that behavioral science can make to management would be this: Our present knowledge indicates that there are a number of important characteristics of individuals and of the work environment that conventional management practice does not take into account. The variables that most managers do not take into account are necessary, but they are not sufficient to explain organized human effort. Since these additional variables are not recognized, the relationships among them are unknown to these managers. Existing behavioral science knowledge affords the possibility of improved control of organized human effort through the inclusion of these variables and their interrelationships in managerial practice."

He embraced the complexity that was management and resisted any attempt to distill one-size-f its-all solutions to complex problems. He resisted attempts to prescribe believing that every interaction was as unique as the people involved.

McGregor's perspective anticipated the "systems thinking" approach that predominates a great deal of managerial theory today. This school of thought posits that myriad forces within large systems are interrelated, and that one can begin to see how their forms of behavior emerge when viewed as a whole. "Behavior of a system is a consequence of interaction of its parts, parts that themselves must be understood and interconnected," wrote pioneer Jay Forrester in "System Dynamics." As McGregor noted in his book, The Human Side of Enterprise:

The outstanding fact about relationships in the modern industrial organization is that they involve a high degree of interdependence. Not only are subordinates dependent upon those above them in the organization for satisfying their needs and achieving their goals, but managers at every level are dependent upon all those below them for achieving both their own and organizational goals. (p. 23)

The implications of such a system's view are critical. McGregor was continually asked the inevitable question that we have all been asked. "I agree with your theory and I am committed to making it happen, but how do you make it happen?" His commitment to learning our way into the future was evident in all of his work, and this probably accounted for much of the resistance he encountered to his ideas. In his day, as today, people sought easy solutions to what proved to be stubborn and intractable challenges. Although there were no answers, he believed that we were dealing with a science in which certain laws about people did apply ( just as in science). He strongly felt that much of what passed for good management in his day was antithetical to what was known about human nature in organizations and that most of our attempts to improve were doomed because it failed to see people as people. It seemed to make the assumption that they were in fact more like resources.

He wanted his students to learn as much as they could about the research that had been done in the behavioral sciences because he believed that only by understanding these findings could we conduct more efficient experiments. For without using existing research in our learning design, we were more likely to conduct experiments that led us to more of what we did yesterday or to try and reinvent the wheel; that is, spend time learning what others had already found.

McGregor wanted us to embrace complexity without being paralyzed by it. He wanted us to conduct simple experiments in a complex system. He wanted managers to include all people in the organization in the planning and execution of those experiments. Even though he tried to hide his biases, many were not well disguised.

His belief in the real power of participation was obvious. He believed that it was important not because it was tactical, but because it was the way the world worked. People simply did not work hard at things they did not have a hand in creating. Rather, they worked hard to achieve deeply felt needs of theirs. His philosophy was greatly informed by Maslow's hierarchy of needs. As McGregor wrote,

All human behavior is directed toward the satisfaction of needs. From birth to death, the individual is engaged in a constant attempt to satisfy his varied, complex, and sometimes conflicting needs. Any given behavior is a resolution of forces arising in part within him and in part in the environmental situation. (Leadership and Motivation, p. 154)

In this respect, McGregor believed that most managers used authority to effect behavioral change through threat or reward, both of which he saw as limiting the employee's ability to realize their needs. He believed that managers could also use their control in a positive manner--to augment their employees natural desire to satisfy their needs rather than rig it.

His belief that we must deal with whole persons if we hope to gain their commitment was also apparent. The idea that people could hide their emotions or leave them at home were ludicrous. As he noted, we really wanted emotions at work but we wanted only the ones that we wanted--loyalty, commitment, and so on.

McGregor saw behavior modification models that used what he called "gimmicks" as doomed to fail. McGregor wanted to see behavior as intrinsically motivated. McGregor railed against any form of control that stifled the innate drive of the individual worker. Sometimes these forms of control would be what he called gimmicks, managerial tricks to gain some form of compliance by individuals. Other times the gimmick would simply be the exertion of authority. Regardless of the form the gimmick took, he decried external attempts to coerce behavior as doomed, short-term measures.

One of McGregor's most important contributions to management today underlies all of these movements. He asked every manager to view management not merely as a toolbox of tasks but as an integrative function that asks them to examine their deepest held beliefs about people and the nature of work. In the next chapter, we will look more closely at this fundamental challenge.

While Douglas McGregor spoke often about the need for managers to examine their operating theories, his ultimate goal was for these theories to manifest themselves as new working models. Today his ideas have become the governing theories behind several important managerial tools and tactics. His beliefs inform many of the practices of today's leading companies--everything from greater decentralization to virtual organizations to competing by design--embody the best of this thinking. McGregor's most influential legacy may be open book management (OBM), which hundreds of companies now practice as a form of employee involvement and continuous improvement.

Open book management evolved out of the Scanlon Plan, a form of management that recognized the value of joint labor-management participation by devising a model plantwide bonus system that focused on reducing costs, improving productivity, and eliminating waste. The practice was developed by Joseph Scanlon, a steelworker and union leader during the depression who became a lecturer at MIT in the 1940s. His plan was based on the dignity and untapped potential of every human being. Scanlon expressed the basic philosophy of his plan:

What we are actually trying to say is simply this: That the average worker knows his own job better than anyone else, and that there are a great many things that he could do if he has a complete understanding of the necessary. Given this opportunity of expressing his intelligence and ingenuity, he becomes a more useful and valuable citizen in any given community or in any industrial operation.

McGregor, who knew and worked with Scanlon at MIT, endorsed his plan wholeheartedly, saying, "I need only mention the Scanlon Plan as the outstanding embodiment of [participation and consultative management] in practice." He saw in this system a method for aligning the interests of workers and their organization. As he wrote, "The Scanlon Plan is not a formula, a program, or a set of procedures. It is a way of industrial life-asumptions entirely consistent with Theory Y." Unfortunately this plan failed to be adopted widespread. "Few managements wished to involve the workers to the degree contemplated in the plan or were willing to make the sustained efforts to maintain the plan over time" (Derber, The American Idea of Industrial Democracy, p. 479.) Today several major companies, such as Lincoln Electric and Herman Miller carry on the tradition.

Out of the grounding of the Scanlon Plan has arisen a more popular managerial practice: open book management, a system of sharing financial information with employees of business units. This plan was made famous by the Springfield Remanufacturing Corporation (SRC). Formerly a division of International Harvester, this unit was purchased in a leveraged buyout by CEO Jack Stack and other managers. Faced with a huge debt load, Stack decided that the best way to turn around operations was to share financial data with every employee in the company, and expect them to put this information to good use. The company began to regularly share financial data with the employees in small groups, and asked them to play what he called "The great game of business," in which people were expected to take individual responsibility for improving the numbers. The approach paid off: SRC is now a $100 million company with a healthy core business. More-over, it has become so adept at the managerial practice it innovated that the company serves as a model for others who want to learn open book management. The company markets OBM instructional material through a teaching subsidiary.

OBM is now practiced by thousands of companies as a means of involving their employees in meaningful work. OBM asks its employees to take a system approach to their work by understanding exactly how the company makes money--how the work they do translates into specific financial consequences at both an individual and overall level. This approach asks individuals to take ownership of their own actions, and it pays accordingly: Many companies give their OBM employees sweat equity in the business, and expect them to enhance its value through their participation. Journalist John Case says of open book management, "In open-book companies, people learn to follow the numbers and help make decisions. They learn to think and act like owners, like businesspeople, and not like hired hands." Douglas McGregor would certainly endorse that.