Charles C. Snow 
Mellon Bank Professor of Business Administration 
The Pennsylvania State University 
Department of Management and Organization 
411 Beam B.A.B. 
University Park, PA 16802 
Telephone: 814-865-2463 
Fax: 814-863-7261 
E-mail: csnow@psu.edu 

 
John A. Mathews 
Associate Professor of International Management 
Macquarie Graduate School of Management 
Macquarie University 
NSW 2109 Australia 
Telephone: 61-2-9850-6082 
Fax: 61-2-9850-7698 
E-mail: john.mathews@mq.edu.au 

 Raymond E. Miles 
Professor Emeritus of Organizational Behavior 
Haas School of Business 
University of California 
545 Student Services Building 
Berkeley, CA 94720-1900 
Telephone: 510-642-3860 
Fax: 510-643-1412 
E-mail: miles@haas.berkeley.edu 

December 1998 

                THE CONCEPT OF THE CORPORATION IN THE TWENTY-FIRST CENTURY 

In 1946, Peter F. Drucker published his classic The Concept of the Corporation. He argued that the post-war period would see the rise of large-scale manufacturing activity, on a scale far greater than ever before, inspired by the success of the American war-time mobilization. The key to meeting the emerging challenge of large-scale operations, according to Drucker, was the ability to build and 
manage large organizations. Drucker advocated the divisional form of organization as most appropriate for the second half of the twentieth century, and he offered General Motors as the corporate exemplar of this approach. 

Drucker's prognostication was prescient, as GM did indeed become the world's benchmark for large-scale manufacturing, and divisionalization did spread from the automotive to other industries and from firms in the United States to Europe and beyond. Over the course of the last half-century, Drucker's original concept of the corporation has been refined and improved through extensions such as 
total-quality management, lean production methods, and global matrix management. These approaches have raised the standards of competitiveness, but they have not fundamentally redefined the "concept of the corporation" as a divisional entity. 

In the 1980s, and increasingly in this decade, many firms have pushed beyond the limits of the divisional form. Some companies, for example, have reorganized into tightly integrated networks of firms along the industry value chain, a significant departure from the hierarchically structured divisional organization. The various organizational experiments, in the aggregate, suggest that a new form of organization may be in the offing. Examining the present tangle of business issues and prescriptions, we see four major trends that will define and test organizational capabilities in the early years of the twenty-first century: 

-  Markets and businesses will increasingly be global in scope, calling for organizational capabilities that produce worldwide integration and efficiency without sacrificing local responsiveness. 
 -  The pace of product and technological change will continue to quicken, creating new markets and competitive pressures, calling for organizational structures that enable firms to rapidly introduce new products and enter new markets while conducting ongoing operations. 
  -  Customers, whether consumers or firms, will increasingly demand individualized attention, requiring the organizational capability to customize products and services while continuing to produce at ever-diminishing cost levels. 
 -   Managers and knowledge workers will increasingly insist on being able to participate as owners in the enterprises that employ them, calling for organizational responses that utilize partnership and ownership incentives to motivate and reward member accomplishments. 

These are not insuperable problems. Companies such as Dell Computer, Kyocera, Technical Computing & Graphics, ABB Asea Brown Boveri, Thermo Electron, and others are, in different ways, developing effective organizational responses to these challenges. However, most of the responses share a common feature -- namely, a reliance on specialized, self-managed, and sometimes member-owned businesses held together by mutual interest and market relations. What they add up to is an integrated enterprise capable of operating in a changeable environment on a local as well as a global scale. We call these self-sufficient business entities cells and the organization structure that links them together the cellular organization. We believe that the cellular form of organization best meets the challenges of our time, though perhaps not exactly in the same manner that the divisional corporation met the challenges of 
the post-war period. Whereas the divisional form clearly dominated corporate organization throughout the second half of the twentieth century, the cellular form of organization is likely to spread less rapidly and may assume various shapes. Nevertheless, in the future, a firm's global competitiveness will hinge at least as much on its self-management capabilities as on the traditional hierarchical approaches used by divisional firms. 

Whereas General Motors best exemplified the divisional form of organization, we believe that the cellular form is best represented on the multinational level by The Acer Group, now a very successful global personal computer firm that has long outgrown its humble beginnings in Taiwan. Acer began its international expansion as a divisional firm, and nearly bankrupted itself in the process. In the early 
1990s, it reorganized along cellular lines and has flourished ever since. It has developed an organizational approach that enables its business units to work together as a worldwide group, a global federation that adroitly handles important business challenges such as attracting and serving global customers, developing new products simultaneously around the world, and generating then spinning off 
new businesses. Acer's responsiveness stems from the specialization and clear focus of its semii-autonomous operating parts, while it maintains its overall coherence and integrity through its sophisticated coordinating mechanisms and common ownership of intangible assets and resources. 

The construction and operation of a global cellular organization presents a daunting set of managerial challenges. Practices that made sense in the era of divisionalization have to be adapted or replaced. The cellular organization calls for members and managers who are comfortable with the exercise of entrepreneurial responsibility and initiative, who can organize and manage themselves in pursuit of 
business opportunities, and who see themselves being rewarded for their efforts not just in terms of salaries and bonuses but in ownership of the business itself. These are management skills far more demanding than those required in the divisional corporation; they are harder to acquire and harder to practice. The cellular organization will not be an easy model to master. 

By his "concept of the corporation," Drucker meant what we would call today a "system" or "model" that encompasses the operating parts of the organization, the relations among them, and the integration of those parts into a total business enterprise, one which is well suited to the environment in which it exists. Drucker's great contribution in his 1946 book was to offer the divisional form, as developed by General Motors, as a complete organizational solution to the manufacturing challenges of the second half of the twentieth century. Likewise, we argue that the emerging cellular organizational principles offer a promising solution to the problems and challenges of conducting a global business in the next century, and moreover, a solution which is superior to that offered by the divisional form. Firms which can effectively operate cellular organizations will be at a decided competitive advantage in the turbulent 
markets of the twenty-first century. 

Why the Divisional Organization Worked in the Twentieth Century 

The divisional form of organization was ideally suited to the business conditions of its time. General Motors is credited with inventing and developing the divisional organization in the early 1920s. Manufacturing firms at that time were able to operate on a large scale using the functional (or unitary) organization structure, but they could not easily diversify their product lines. The divisional structure 
enabled GM to segment the automotive market and offer products tailored to each segment. Later, in the 1950s and 1960s, companies such as General Electric extended the logic of the form to include completely different products and markets, resulting in the diversified corporation. More than any other person, Peter Drucker helped managers to operate diversified, divisional firms by inventing and teaching concepts such as Management by Objectives and decentralization. Drucker's offering was complete in that it included an organization structure (divisional), the critical coordinating mechanisms (MBO, etc.) required to operate it, and a corporate role model (General Motors) for other firms to emulate. For many years, there was a tight fit between the business environment of the industrialized world and the divisional mode of corporate organization. 

Then, in the 1970s, things began to change. The increased use of outsourcing, the rise of Japanese management approaches, and a host of other factors created massive upheaval in Corporate America. The result, which many veteran managers recall with dismay, was essentially a propping up of the divisional form of organization through downsizing, delayering, and reengineering. Eventually, the 
divisional structure was stretched to its limits. By the late 1990s, even Drucker himself was searching for newer ways to organize that better matched the changing environment. 

New Challenges, New Responses, and New Examples 

We believe that Drucker's "recipe" for anticipating the future of organizations is still sound: concisely characterize the new competitive challenge, describe the appropriate organizational response, and provide company examples. We would like to use the same recipe to analyze the business demands and responses of the twenty-first century. 

New Challenges. As most observers probably would agree, the overall challenge facing most of today's organizations is globalization.In the twenty-first century, the vast majority of organizations, large or small, will exist in an interconnected environment of global proportions. To be successful, organizations will have to be comfortable operating in complex, pluralistic, and, in many instances, rapidly changing business environments. More specifically, such environments will pose four major operating demands: 

1. Simultaneous Global Efficiency and Local Responsiveness. Sometimes referred to as the "global-local dilemma," organizations of the future must be able to act big or small depending on the matter at hand. They must be able to operate on a scale that achieves worldwide efficiency in their various businesses while at the same time being responsive to local and regional market conditions. 

2. Speed. In many businesses in the next century, organizations will have to be able to do the right things quickly anywhere in the world. Such organizations will be agile - they will conduct their businesses smoothly and easily, and they will be smart. Many companies today are already capitalizing on time-based strategies that reduce product-development cycle times, gain timely access to 
geographically dispersed resources, and serve customers on an anytime-anywhere basis. 

3. Customization. The customization era began many decades ago when companies such as General Motors modified their products to suit different segments of the market. Tomorrow's customers will expect much more. In many categories, they will want to co-produce the products and services they consume. Not only will they expect to receive variety and choice; they will want to participate in the design of the product or service as well. 

4. Ownership. In traditional organizations, managers and employees work for owners, and in return for their efforts and accomplishments, they receive paychecks. In organizations of the future, stimulated by the continuing spread of free-market philosophies and practices, members will work for themselves. They will retain ownership of their ideas and skills, and they will share in the profits produced by their efforts. In many cases, the organization will "work for" its members in the sense that managers and 
employees will create only those organizational processes that facilitate their working together -- and nothing more. 

New Responses. Although these are four big challenges, they are factors that nevertheless have been developing for some time. Consequently, some companies already have in place a partial solution to the twenty-first century organizational puzzle. Collectively, those companies offer concepts, practices, and even a preliminary language from which a new form of organization can be discerned and described. For example, ABB Asea Brown Boveri has divided its worldwide operations into approximately 5,000 profit centers, thereby demonstrating how small autonomous units can be used as the building blocks of a huge global organization. Dell Computer, through creative supply-chain management, operates its personal computer business at incredible speed and with unparalleled efficiency. Kyocera, a Japanese equipment manufacturer, organizes its manufacturing process into small teams called "amoebae." Like 
amoebae, these manufacturing cells can change their size and shape as needed to build customized products for their customers. Technical Computing & Graphics, an Australian company, is a highly collaborative network of small firms each of which has entrepreneurial responsibility. A given TCG firm pursues its business opportunities through "triangulation," a three-cornered alliance among one or more TCG firms, a large joint-venture partner (e.g., Hitachi), and a principal customer (e.g., Telstra). And, lastly, Thermo Electron spins off subsidiary companies in order to maintain closeness to the customer and clear accountability for profits and share price. The managers of the spinoff company own stock in the enterprise, and if it performs well they receive extraordinary rewards. 

From these and other examples, the outlines of a new organizational form have begun to take shape. The emphasis in all cases is on small entities (be they teams, plants, or firms) taking responsibility for their own entrepreneurial actions within an overall vision and system that defines the organization as a whole. The successful international examples have achieved a balance between local autonomy and global accountability. It is in creating the structures which make such a balance an explicit organizational requirement, and then in finding ways to manage it, that these successful companies demonstrate their competitive superiority. 

We choose to call this new form of organization the cellular structure. Alternative terms have been used, by others and by ourselves. However, it is the cellular metaphor which seems to best capture the idea of self-reliant parts responding quickly to opportunities or adapting to unforeseen events, but always within the interests and operating rules of the total organization. The cellular metaphor evokes biological images of growth, nurturing, and vitality -- all attributes of "living companies." The cellular concept leads away from the notion of externally imposed control towards the idea of self-imposed order. The managerial challenge is to preserve autonomy while providing structures and processes within which autonomous entities can find common ground and work together. Three main principles underlie the design and operation of a cellular organization. 

Self-sufficiency and Autonomy. In the cellular organization, the operating entities are self-sufficient, highly autonomous business units. These units (cells) have a direct business relationship with other cells and with outside customers. Cells have the responsibility to grow 
their business, and they are fully equipped with the skills and resources to do so. 

Self-governance Through Network Communication. Relations among the operating units are governed by direct cell-to-cell contracts, negotiated within the terms of a set of rules voluntarily agreed on by the organization as a whole (e.g., a rule might be that profits are to be obtained from customers not other cells). Governance is predicated on the cells performing their own required coordination within a context of high trust. It is this internal market-mediated system of relationships that gives the cellular organization 
its extraordinary flexibility and responsiveness. 

Integration. Cells need to be designed in such a way that by pursuing their own interests they optimize the interests of the organization as a whole. This is the principle of cellular integration. Integration is reinforced by constructing cells so that their competencies are complementary to each other and by the common ownership of tangible and intangible assets. 

An organization that exhibits features associated with cellular self-sufficiency, self-governance, and integration can be said to be a cellular organization. Such an organization would have properties especially suitable for tomorrow's business environment. 

Exhibit: Benefits of the Cellular Form of Organization 

An organization designed according to the principles of cellular self-sufficiency, self-governance through network communication, and integration is able to develop certain desirable properties, including: 

   1. Cellular organization maximizes entrepreneurship.  
     Cells are endowed with a business mission and are given sufficient resources to pursue their mission. What they bring to this task is their own entrepreneurial energy unconstrained by divisional rules or rivalries. 

   2.A cellular organization encourages distributed ownership. 
     Cell members work best if they have a strake in the business they are developing. Ownership as a reward thus arises naturally in a cellular setting and is a prime motivator of organizational performance. Ownership encourages self-discipline; people do not  knowingly damage their own property. 

   3.  A cellular organization has a bias towards teaching and learning.  
     Individual cells have an incentive to improve their own operating procedures (type of learning), and their improvements are quickly diffused to other cells through direct cell-to-cell contact (a type of teaching). It is the inter-cellular dynamics of this organizational form that gives it the capability to adapt quickly. 

   4.  A cellular organization is cemented with trust. 
     The key to inter-cellular cooperation and communications is the absence of rivalries and the common ownership of assets and resources. Collaboration that is unfettered by a need for political maneuvering engenders trust. Trust, coupled with cell competence and motivation, provides the basis for quick, coordinated action. 

A New Company Example. The company which we believe best represents the cellular organizational approach on a global scale is the Taiwan-based Acer Group. Acer was founded by engineer-entrepreneur Stan Shih in 1976 (at that time the company was called Multitech International Corporation), and it has since grown to become Taiwan's best-known company. It holds the number seven position in the global personal computer industry through both its branded and OEM sales. By the late 1990s, Acer was employing over 15,000 people in 80 offices located in 38 countries and selling PCs and components in over 100 nations. Acer decided in the mid-1980s to become a major player in the world PC business, and it used what it called "serious management" methods to achieve its 
expansionary goals. For example, it expanded abroad by means of mergers and acquisitions, and it imposed centralized control on its new subsidiaries from corporate headquarters in Taipei. It even hired an IBM vice president to act as global chief executive in overseeing this transformation. However, by the early 1990s, the company had nearly bankrupted itself through these efforts, modeled as they were on the conventional divisional firm. 

In a bold reorganizational effort, Shih essentially reinvented Acer, abandoning the notion of divisional control and replacing it with the creation of a series of semi-autonomous business units, some responsible for production and others for opening up new markets. The overall intent was to create a different worldwide structure which would promote interdependence among a group of highly 
entrepreneurial operating units. "Our 'new' company is built on a few simple business principles," says Shih. Acer's approach to global strategy and management -- organized around interesting concepts such as a client-server organization structure, fast-food business model, and partnership through ownership -- may serve as a strong model for international companies in the new business environment. 

Shih uses the phrase "21 in 21" to describe his vision for the company. He foresees Acer consisting of at least 21 locally owned public companies by early in the twenty-first century. Ultimately, Acer will be a global federation of companies held together by mutual interest and cooperation. Each company will want to work with the other companies in the group because each firm will be the preferred provider in its particular specialty or market. To achieve this objective, Acer uses what it calls a client-server organization structure. Each Acer firm, depending on the type of transaction involved, is either a "client" or a "server" of the other firms in the federation. Some firms, called Regional Business Units (RBUs), are operated primarily as marketing organizations - advertising, selling, and servicing computers according to particular national or regional needs. RBUs are responsible for growing their business in 
designated parts of the world, sourcing their products from Acer's production units but also from other sources if these are deemed superior. Other Acer firms, called Strategic Business Units (SBUs), are primarily R&D, manufacturing, or distribution units. They are empowered to develop their product and manufacturing business, through sales both to OEMs (including such leading companies as IBM, Apple, and Compaq) and to Acer's own RBUs. For the most part, RBUs are clients that receive products from servers, the SBUs. However, the relationship also works in reverse. RBUs are required to submit on an ongoing basis short, medium, and long-term forecasts of their product needs. In this mode, the SBUs are the clients of the RBUs - depending on each RBU's knowledge of its local market to provide information that will drive product development and manufacturing. Thus, SBUs and RBUs interact in a business-like way, setting realistic prices for the transfer of components and systems, with the understanding that they are not seeking to profit from each other but rather through expansion of outside sales. 

The primary coordinating mechanism among the various RBUs and SBUs is the fast-food business model. Conceptually, this global production and marketing system operates much like McDonald's. Just like a Big Mac is assembled from fresh ingredients into a hamburger right before purchase, Acer assembles its computers using fresh technology. All components have been divided into "perishable" and "nonperishable" groups. Nonperishables, such as PC housings, keyboards, and monitors, are manufactured centrally and shipped by sea as RBUs order them, with a one- to two-month arrival lag. Perishables, such as motherboards and disk drives, are manufactured to order and shipped by air. There is only a two-week arrival lag, and these ingredients are timed to arrive simultaneously with the nonperishable components. Components are assembled at 39 strategically located sites around the world and moved to dealers for swift delivery to customers. In the company's Taiwanese dealer locations, for example, Acer has achieved essentially zero inventory. The fast-food business model has been a great success for Acer, primarily because the production and marketing parts of the organization learned to work together as business partners. 

Unlike a divisional corporation, Acer firms are each jointly owned by their own management and home-country investors, with a (usually) minority ownership position held by Acer, Inc., the parent firm. This is Acer's partnership through ownership philosophy. By having each firm listed on its national stock exchange and free to seek capital for its own expansion, Acer believes that there is a powerful motivation to operate each business prudently. According to Shih, "This approach exploits the energy of capitalism and spreads its benefits. I get rich if I help my partners get rich." To keep the different parts of the federation working together, Acer must ensure that each constituent firm is a world-class performer of its particular specialty so that the other members of the group will prefer it over alternative providers. 

Lastly, the overarching concept that Acer uses to guide the resolution of the global-local dilemma is global brand/local touch. Acer intends to operate as a local company in every market it participates in around the world. Thus, the marketing units (RBUs) have grown not by seeking targets for acquisition but by developing partnerships with some of the best dealers in each market (e.g., Computec in Mexico or Wipro in India). Acer wants its local affiliates to have maximum freedom to pursue their own interests while recognizing their obligations to other members of the group. Simultaneously, Acer complements its networking or "local touch" approach with common ownership of a global brand. Acer is the first Taiwanese company to invest in a brand name on a global scale, and it regards the Acer name (Latin for "sharp, acute") as the single biggest asset of the group. The total enterprise is constantly exploring and discovering the operational implications of global brand/local touch. Corporate-headquarters management maintains tight control over how the brand is used, and it will intervene if it believes that the Acer name is being devalued in any way. Every firm in the group understands the importance of the Acer brand and the need to protect it. At the same time, the local companies have to determine how the brand is best utilized in their national or regional market. 

In sum, The Acer Group is the case known to us that best approximates the cellular model of organization. It incorporates all three principles of cellularity in its global operations. First, by designing each cell (RBU or SBU) as a highly competent specialist in charge of its own business interests, the company generates a tremendous amount of entrepreneurship throughout the group. Second, the 
thoughtful application of organizational concepts such as the client-server structure, fast-food business model, and global brand/local touch allows the cells to manage across boundaries with minimal hierarchical intervention. And, third, partnership through ownership provides the main source of integration throughout the federation, encouraging cells to work collaboratively with each other so that the total enterprise moves ahead quickly and adapts as appropriate. 

How the Cellular Corporation Outperforms Its Divisional Rival 

The way to evaluate organizational forms is not to examine their features in the abstract but rather to test their responses to demanding situations that are crucial to business success. It is not by reading an organization chart that one understands how a company works; it is by observing its response to important, recurring business challenges. Every company that aspires to global presence in the next 
century will have to meet many such challenges. Three of the most prominent are: (1) attracting and serving a global customer, (2) continuously developing new products, and (3) growing new businesses. The cellular corporation will prove its superiority over the divisional firm in the way that it handles these kinds of challenges. 

Exhibt: The Cellular vs. Divisional Corporation 
 

Attracting New Global Customers. If a firm is to be seen as a truly global player, it needs to be able to attract and retain global customers. If the firm is in the personal computer business, like Acer, then this means being able to provide customized products and systems to companies such as Citibank or Siemens, and to make deliveries and service calls wherever the customer needs them. The global customer expects uniform pricing and a substantial discount for bulk purchase. It also expects to take delivery of the product at any of its locations, and it expects those deliveries to be as fast in Ho Chi Minh City as in Manhattan. How does the cellular organization tackle this challenge? 

The problem of providing a coordinated response is solved by the cells networking among themselves, not by resorting to a hierarchical solution as would a divisional firm. For example, in The Acer Group, internal negotiations take place to iron out "representation" rights among the various RBUs and SBUs which will be involved in filling supply contracts. Normally, one would expect the RBU that initiated contact with the global customer to remain as the contact point, and for other Acer RBUs and SBUs to 
deal with the customer through this designated RBU. 

For Acer to offer uniform pricing and delivery contracts, across several RBUs and SBUs, there needs to be some mechanism for reaching a common position, and in particular for one RBU not to be induced into underpricing or in some other way competing directly with another RBU for the global customer's business. (The global customer might not be averse to putting two RBUs into direct competition with each other or dealing with several RBUs at once without informing them of the parallel negotiations.) 

If bulk-purchase discounts are to be offered, the sharing of the burden across several RBUs and SBUs needs to be negotiated.Although there are different solutions to this problem, Acer has decided that the "contact point" RBU will bear the discount itself after having internally negotiated a pricing scheme with the other RBUs and SBUs. 

Acer can attract a global customer precisely because of its global reach - it can promise to deliver and service PCs promptly anywhere in the world. However, in order to keep its promise, Acer needs to have mechanisms in place to monitor the quality and reliability of service provided across several of its RBUs and SBUs. Acer's solution to the problem of local servicing states that if one RBU secures 
a global supply contract with a multinational client, then all affected RBUs and SBUs will honor this contract on the same terms and conditions. 

All of the above solutions to the problem of meeting the needs of a global customer have been worked out by task forces and in biannual meetings of the Acer Summit, both under the broad aegis of the global brand/local touch philosophy. Common to all of these solutions is the large amount of autonomy granted to each contact-point RBU to put together business deals both with global customers 
and within the Acer group of companies. 

How does the Acer approach compare with that of a divisional company? The divisional firm struggles to meet the challenge of serving a global customer. While superficially it may appear to have the edge, in that the customer simply may be assigned to a particular product division, in practice the demand for uniformity around the world calls for many geographic divisions to be involved and for some form of coordination to be effected among them. Negotiations between product and geographic divisions are likely to be conducted in the senior executive suite and be subject to politicking and power plays that have nothing to do with the merits of the particular contract. Information to be fed into the negotiations has to be collected by senior executives from account managers lower in the divisional hierarchy. By contrast, Acer is able to put account managers directly onto an inter-RBU task force where they can deal with each other directly and on the basis of their own intimate knowledge of the customer and market. The divisions within the divisional firm behave at least partly like political entities, whereas the RBUs and SBUs within Acer behave like individual businesses. The Acer companies are likely to reach a better-informed, quicker agreement on the basis of their mutual interests. 

Developing New Products. In the divisional firm, primary responsibility for new product development lies with each division, as evident in companies such as Rubbermaid. Other divisional companies, such as Hewlett-Packard and 3M, have both corporate (basic) and divisional (applied) R&D operations. In both types of divisional companies, product and technological innovation is a high priority. However, such innovative capability is not without its problems. For example, interdivisional rivalries abound as divisions compete against each other for resources from corporate headquarters and as they try to protect their respective territory from encroachment. Innovation thus comes at a high cost and takes place within a secretive and selfish atmosphere. 

In a cellular organization, new product development occurs in an open, cooperative manner. At Acer, product innovation can begin anywhere in the group, and persuading partner firms to participate in the venture serves as a strong test of the viability of a proposed idea. Take, for example, the case of Acer's Aspire, a home computer that is one of the company's most successful products. The Aspire, now in its fifth generation, grew out of an initiative of Acer America, an RBU based in San Jose, California. A marketing organization, Acer America gathered ideas from consumers through focus groups and learned that American consumers wanted a "friendly" and "comfortable" home-PC design that did not remind them of the office. 

Acer America decided that it needed a professional design group to aid it in the design of the machine itself, and after short-listing several firms in Silicon Valley, settled on Frog Design, an experienced industrial designer (though not yet in personal computers). When the design was ready for production, Acer America led a manufacturing team that ultimately involved four of Acer's Taiwanese-based 
SBUs. Lastly, it was agreed that the public unveiling of Aspire would be in the United States (in recognition of Acer America's initiating role) but that other Acer RBUs would have the right to announce their own marketing campaigns two months later. Marketing materials for the U.S. launch were made available to other Acer RBUs, and some (such as ACI in Singapore) were particularly 
creative in adapting the materials for their own use. The entire Aspire project - from focus-group discussions to mass production and marketing - took only about nine months, and the product has served as a worldwide public relations triumph for Acer. Since the Aspire, there have been further product development efforts conducted according to the same innovation process, such as the mobile 
PC called AcerNote Nuovo. 

Growing New Businesses. Every firm needs to develop new businesses in order to survive. This will be especially true in the demanding competitive environment of the next century. The cellular organization has a bias towards starting and nurturing new businesses from within its existing cells and then spinning them off as separate business units at an appropriate time. Ultimately, the spinoff process could result in an autonomous, member-owned firm. A cellular organization, as would any living company, regards this 
means of growth as entirely natural. 

Consistent with the balance between local autonomy and global accountability, an existing cell that recognizes a new business opportunity begins to pursue it itself, subject to the accepted rules of the total enterprise. If the new business flourishes, it is managed by the originating cell up to the point where the enterprise's coordinating center judges the new business to be ripe for spinning off. The generating cell is then split into the old and the new business. This might be painful for the "old" cell, but entrepreneurship and ownership are given precedence over everything else. The new cell's survival is made likely by the fact that it can - indeed must -draw support from other cells in the organization. To survive and grow on its own, it must forge relations with other cells in a self-organizing fashion. 

The divisional firm, by contrast, cannot easily integrate a new business into its existing structure. If the new business is kept within the originating division, its success will cause the division to grow and become increasingly hierarchical. An alternative solution is to create a new division for each new business - in the way that General Motors created the Saturn division to design and build a new compact car. This solution, however, leads to a proliferation of divisions whose coordination becomes increasingly difficult. Because of these kinds of difficulties, divisional firms frequently resort to mergers and acquisitions as the means of "growing" and "diversifying." But this is not growth in an organic sense; it is merely an extension of hierarchical control. The new businesses typically are not integrated into the 
existing organization and are seldom expected to work closely with other divisions through their own initiatives. 

In the case of Acer, the generation of new businesses is fast and efficient, resembling the budding process in a healthy plant. For example, Acer Netxus was formed to cater to Acer's growing Internet business. It was created out of two existing SBUs (Information Products and Acer Peripherals) and took over from them some staff and an initial set of Web-based communications products. Acer 
recruited a highly regarded engineer from Taiwan's central research laboratory to lead the new unit. Acer Netxus then forged its own business links with Acer's existing RBUs and SBUs, offering them its new products as alternatives to the externally supplied products they had been purchasing. In the cellular organization, the newcomer has to convince its fellow cells to make the switch by offering superior products and services as incentives. Thus, the new business is sheltered in its early phase, given all the support it needs to meet the pressing demands of the existing business units. Acer can be said to function as an efficient business incubator. 

Implementing the Cellular Organization 

A cellular organization is not easily constructed - indeed it involves major challenges. Just as Drucker foresaw that it would be the corporations that could effectively transform themselves into divisional organizations that could best respond to the challenges of large-scale production, so we see companies becoming superior competitors in the future if they can master the intricacies of cellularity. It is not just a matter of dividing a company into small pieces and calling each piece a "cell." It calls instead for a substantial organizational reengineering that is grounded in a new philosophy of management and a new vision of the corporation as having entrepreneurial, self-managing, and ownership attributes. 

Cellular organizations evolve most easily when they are allowed to "happen" without the constraints that are normally imposed by traditional organizational forms. For example, an entrepreneurial group sees a business opportunity, and instead of having their vision curtailed to fit with existing divisional boundaries or being forced to leave to start their own independent venture, they are given the resources and the responsibility to develop the business (consistent with the requirements of the total enterprise). Thus, a new cell is born. A handful of such experiences creates a network of cells, and a set of operating rules evolves, as circumstances demand them, to keep the cells working together rather than drifting apart. This is how successful cellular organizations like Technical Computing & Graphics evolved. 

Alternatively, and more likely, a company that becomes large, gets a new CEO, or suffers a crisis begins to look for a more flexible organizational form. Creating viable cells out of an existing functional or divisional structure requires considerable corporate surgery and pain, but the transformation can be made bearable if the philosophy behind the changes is well explained and if the people involved 
have a say in the new cells' mission and a meaningful stake in subsequent accomplishments. Acer was born of such a restructuring, as was ABB Asea Brown Boveri, and most of the quasi-cellular organizations with which we are familiar have developed from within traditional organizational arrangements. 

The first step in a successful transformation from a traditional to a cellular organization is to create strong business cells. The key to cellular viability and sustainability is self-sufficiency. Whatever the scale of the cell, whether it be a group of people working together, or a business involving hundreds or thousands of staff scattered around the world, it must have the resources needed for its own independent activity. It must be a business in its own right. Sustainability and viability rest, first, on each cell being highly competent in its particular specialty, and second, on the expectation that cell members will assume entrepreneurial responsibility. 

The next step is to focus on the interdependence and coordination among cells. A well-structured cellular organization deliberately creates interdependencies among its cells so that they are forced to contract with each other for products or services. In Acer, for example, the regional business units contract with the production units for their essential product supplies, while the production units 
contract with the regional units for sales and marketing. Yet both RBUs and SBUs are viable businesses in their own right, making their own strategic decisions and planning their own initiatives. Each cell is free to initiate new products, as Acer America did with the Aspire home computer, provided that it can persuade other cells to collaborate in product design and manufacturing. All of Acer's cells 
have a propensity to collaborate, since by doing so they are likely to expand their own business. Each cell, too, coordinates its own operations, with only minimal guidance from central management. 

A third implementation requirement involves the heavy investment in human capability that underpins the optimal working of the cellular organization. If cell members are to demonstrate initiative and responsibility, then they have to be equipped with the knowledge, skills, and information to do so. Even more importantly, they have to be allowed the level of self-governance needed to exercise responsibility 
and take initiatives. The creators and leaders of a cellular organization, therefore, must practice a human investment managerial philosophy, one that assumes organization members are willing to act as partners in their own development. Such a philosophy must also be extended to the other "partners" of the cellular firm, particularly key suppliers and customers. 

Skills and responsibilities are exercised, and self-discipline is practiced, when cell members see themselves as having a stake in the success of their endeavors. This is why common ownership and cellularity fit together. The motivation of a cellular organization is both fueled and rewarded by ownership. If organization members of the future are to accept entrepreneurial responsibility, traditional reward schemes such as bonus plans are not likely to be sufficient. Most likely, the future structure of return-sharing will reflect the philosophies of business leaders like Stan Shih - that the long-run pursuit of an increasingly competent organization requires mechanisms providing real ownership and profit-sharing, mechanisms that give members' intellectual capital the same rights as the financial capital supplied by stockholders. 

Finally, implementation must address the competencies of individual managers. Managers in a cellular environment need to be comfortable with the widespread use of self-governance and with people taking initiatives by and for themselves. Managers cannot get in the way of people who know what they have to do and how to do it. However, there is a requirement for managers to periodically exercise leadership - for example, to know when to intervene to keep two cells from coming into open conflict, to facilitate the splitting of an existing cell into two cells, and so on. These are demanding leadership responsibilities, calling for competencies that far exceed those normally found in "managing" an ongoing operation. Christopher Bartlett and Sumantra Ghoshal have analyzed many of the world's most successful international companies and have concluded that managers in these firms need to learn how to operate in new conditions, placing less emphasis on issues such as control and compliance, and more on the conditions which generate support, trust, stretch, and self-discipline. The same reasoning applies to the management task within the cellular organization but with even greater force. Managers in the cellular organizational setting must be comfortable not just with trust and support, but with the exercise by managers and staff of large amounts of discretion and initiative. In contrast to the situation in a divisional corporation, where responsibilities are clear-cut and performance criteria are equally clear and strictly enforced, a cellular system has a margin of ambiguity or "fuzziness" that comes from incompletely specified responsibilities. Such fuzziness is traded off against responsiveness and initiative.Hence the paradox that the cellular organization gives more discretion but makes more stringent demands on managers. Managing in a cellular organization is not for the faint-hearted. 

Conclusion  

Peter Drucker's contribution over fifty years ago was so extraordinary because he formulated, for the first time, a total concept of the corporation as a business entity that meets the social and economic demands of its time. In the years immediately following World War II, those demands were for large-scale manufacturing along decentralized lines and the opening up of mass markets -- demands that 
were superbly met by the innovation called the divisional organization. We believe that the cellular organization is a corresponding total concept of the corporation that fits the demands that are emerging now and are likely to be dominant in the early part of the twenty-first century. 

Companies such as The Acer Group are already demonstrating how the cellular organization can succeed on a global scale. It is those companies which can master and apply the principles of cellularity which will perform best in the new business environment. Managers, of course, will be faced with new tasks and challenges in the cellular structure -- but with new kinds of rewards as well, including 
financial rewards stemming from ownership and spiritual rewards stemming from collaboration, trust, and the exercise of self-discipline. Terms made famous in the era of divisionalization, like Management by Objectives and decentralized decision making, will come to be replaced by new terms such as cellular entrepreneurship, expansion through networking, and partnership through ownership. 
Managerial characteristics such as self-sufficiency and self-management will eventually replace the more familiar traits of loyalty and motivation. Indeed, the well-managed cellular organization does not have a "motivation problem" because it has solved the issue of motivation at its source, by giving people jobs that are intrinsically rewarding and by providing them with genuine ownership of their enterprise. Nothing less will be expected of corporations in the next century. 

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Notes: 

   1.  For over view of Acer's business philosophy and methods, see John A. Mathews and Charles C. Snow, " A Conversation with Taiwan-Based Acer Groups's Stan Shih on Global Strategy and Management, Organizational Dynamics, Summer 1998, 65-74. 

   2.  See Alfred D. Charles, Jr. Strategy and Structure: Chapters in the History of the American Industrial Enterprise (Boston: The M.I.T. Press, 1962), Chapter 3, for details of the General Motors situation. 

   3.  See Peter F. Drucker, "Toward the New Organization," in Frances Hesselbein, Marshall Goldsmith, and Richard Beckhard (Eds.), The Organization of the Future (San Francisco: Jossey-Bass, 1997), pp. 1-5. 

   4.  For additional details on the situation at ABB Asea Brown Boveri, see William Taylor, "The Logic of Global Business: An Interview with ABB's Percy Barnevik, " Harvard Business Review, 69, March-April 1998, 72-84. For Dell Computer, see Joan Magretta, "The Power of Virtual Integration: An Interview with Dell Computer's Michael Dell," Harvard Business Review, 76, March-April 1998, 72-84. For Kyocera, see M. Zeleny, "Amoebae: The New Generation of Self Managing Human Systems," Human Systems Management, 9, 1990, 57-59. For TCG, see Raymond E. Miles, Charles C. Snow, John A. Mathews, Grant Miles, and Henry J. Coleman, Jr., "Organizing  the Knowledge Age: Anticipating the Cellular Form, " Academy of Management Executive, 11, 1997, 7-20. For Thermo Electron, see Adrian J. Slywotzky and David J. Morrison, The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits (New York: Times Books, 1997). 

   5. Raymond E. Miles and Charles C. Snow ("The New Network Firm: A Spherical Structure Based on a Human Investment Philosophy," Organizational Dynamics, Spring 1995, 5-18) used the phrase "spherical structure" to convey the idea that the organization could rotate its operating parts to meet any customer's requirements. Gerard Fairlough (Creative Compartments: A Design for Future Organisation, London: Adamanine Press Limited, 1994) referred to the small but powerful building blocks of  a larger organization as "creative compartments." John A. Mathews ("Holonic Organisational Architectures," Human Systems Management, 15, 1996, 1-29) used the phrase "holonic organization" after the terminology introduced by biologist Arthur Koestler (The Ghost in the Machine, London: Hutschinson, 1967). A "holon" is an organizational entity that is both part (-on) and the whole (hol-). Thus, it captures the idea that in a cellular organization, the cells are "wholes" in that they have self-acting capability, but they are also "parts" because they cannot act completely without obtaining resources from the rest of the organization. 

   6.  According to Arie de Geus, living companies have traits and abilities that allow them to renew themselves over many generations. See his article, "The Living Company," Harvard Business Review, 75, March-April 1997, 51-59. 

   7.  The specific attributes of the human investment managerial philosophy, as well as where and how it can be applied, are discussed in Raymond E. Miles and Charles C. Snow, Fit, Failure, and the Hall of Fame: How Companies Succeed or Fail  (New York: Free Press, 1994), Chapter 9. 

   8.Christopher A. Bartlett and Sumantra Ghoshal, The Individualized Corporation: A New Doctrine for Management (New York: HarperBusiness, 1997).