Future of Work : CBI Journal 9: Adaptive Imperative
Perspectives on Business innovation issue 9 : The Adaptive imperative
Published January 2003 - reprinted here by permission.
We print below the "big idea" article from the Journal ( Embracing Evolution : Business from the bottom up ), the table of contents of the Journal, and also Christopher Meyer's introduction to the Journal, setting out this issueis themes.
You can download the full Journal in Adobe Acrobat format ( 1.5MB )
EMBRACING EVOLUTiON: BUSiNESS FROM THE BOTTOM UP
About the Authors :
Christopher Meyer was director of the Cap Gemini Ernst & Young Center for Business innovation. He has more than 20 years of general management and economic consulting experience and is an authority on the evolution of the information economy and its impact on business. With Stan Davis he co-wrote Blur: The Speed of Change in the Connected Economy, and Future Wealth.
Stan Davis is an independent author and speaker based in Boston as well as a CBI Network fellow at the Center for Business innovation. He advises leading companies and fast-growing enterprises around the world. in addition to co-writing Future Wealth and Blur, he has written nine other books, including 2020 Vision, The Monster Under the Bed, and the bestselling Future Perfect, recipient of Tom Peter's "Book of the Decade" Award. His books have sold more than a million copies and appear in 15 languages.
The following article was adapted from the book "It's Alive: The Coming Convergence of information, Biology, and Business", by Christopher Meyer and Stan Davis ( Crown Business, Spring 2003 ).
As customer demand fluctuates, technological advances increase, and knowledge becomes an elusive commodity, the world becomes more uncertain and less predictable. it's not just the current recession, the dot com bubble, the aftershocks of 9/11, or the spate of corporate scandals. The toughest problem business faces today is adapting to changes in the economic environment as fast as those changes occur. This challenge is paramount because change is more prevalent and extreme in today's volatile world. Yet, what is driving this persistent increase in the rate of change ?
While no single answer provides the whole explanation, one clear contributor is connectivity. As information technologies proliferate, the world around us becomes both more connected and more autonomous, creating an environment of increasing volatility and accelerating change. As connectivity proceeds, business leaders face an imperative to create organizations that can adapt continually and rapidly, to keep pace with shifts in their markets, technologies, and society itself.
The End of Stability as You Know it
Historically, progress in connectivity has shrunk the globe in space, in time, and in the effort required to support interactions among people, companies, and ideas. Each leap of connectivity has contributed to a shrinkage in cycle time as well as an increase in the rate at which ideas spread.
Greater connectivity also means that a signal created in any market, society, or system can propagate faster. When networks become intensely connected, they start to become 'nonlinear', that is, small changes can lead to disproportionately large effects. in short, they become volatile. And the more connected any system becomes, the harder it is to anticipate how some newly made connection will affect the stability of that system.
At multiple levels, volatile change has always been a part of the human experience, but our world view and our business models belied that. Our institutions, businesses included, have been built for stability, not for change. We have tried to forecast, always looking for the perfect plan, based on indicators of the past. in time, we have acknowledged that there is no single best way to strategize, only probabilities and the art of decision-making amid uncertainty. Now, we must accept that the increased rate of change in the economy poses the 'Adaptive imperative'. To survive and prosper in these conditions, business must learn to adapt as fast as the business environment changes.
The world of biology holds the key to meeting that adaptive imperative. Adaptation, the process by which organisms respond to volatility in their environments, has been going on in nature for the past 4 billion years. As businesses today are struggling with volatility, they can look to nature's example for lessons on adaptation. By taking these experiences and codifying them into a few practical rules, we can lay out the path to the Adaptive Enterprise.
The Path to the Adaptive Enterprise
Business has always been adaptive to some degree. Companies have been forever trying to stay ahead of the curve. And it shouldn't be a surprise that, in most cases, the impetus has usually been changes in the industry environment. But if your environment has not forced you to become adaptive thus far, why should you take action ? The answer is that the connected economy is accelerating the rate of change, creating the Adaptive imperative. if destabilizing change has already hit you, you probably haven't begun to catch up with it. if it hasn't hit you, it will. And the approach a company takes to address volatility affects its performance in terms of both growth and market value. Where should you begin ?
First, look for the sources of volatility in your business environment: raw materials costs or availability, weather, market conditions, technological change, or competitive activities. Then ask: How can i better anticipate this volatility ? is there a hidden factor driving it that i can isolate and identify ? Or, is some new sensor available ?
Second, assess the economic impact of that volatility. Are expensive assets deployed against contingencies ? Or, is significant business being lost because of an inability to respond ? How many cars are on dealer lots because you can't sell from an empty shelf ? How often is the exact car the customer wants in stock ? in nearly every industry, if you could respond to customer demand more rapidly, you could free up inventory.
Third, what could be done to make these business processes and operations more adaptive ? We'll outline a systematic approach to adaptive principles for managing later in this article.
Fourth, are there systems, rules, or other constraints, which, if simply removed, would allow a more adaptive approach ? Remember, first we shape our systems and then they shape us. What constraints are built into our businesses that prevent effective response or adaptation ? Often, these are systems that were installed in the name of control or efficiency on the assumption of infrequent change or low volatility.
in sum, first identify important volatilities, then link them to significant costs or revenue opportunities, identify constraints, and consider adaptive solutions. This straightforward process can apply to any part of an enterprise. The hardest part is finding the solutions to your volatility problems, because many of them are unfamiliar and management lacks the knowledge of where to look.
Complex systems in the natural world help to identify several concepts that translate well to adaptive business solutions, based on a set of rules. We call these rules 'Memes for Managing' to convey the gene-like properties of the ideas. As enterprises adapt, the rules themselves will continue to change, just as genetic information evolves over time. While these six memes are right for management today, new ones will overtake them eventually. if leaders in an organization start embodying the memes of Adaptive Enterprise, they will gradually extend to others, and over time they will change the organization's behavior.
Coping with Volatility
Adaptive management is not a new manifesto that replaces everything that came before. Rather, it is a set of ideas that extend the capabilities of the enterprise. in the past decade, information technology, time, and the implementation of change became dominant issues in business thinking and, in many respects, beyond business and in society as a whole. But we have yet to articulate a new management system that assumes every day will bring not stability, but volatility, not predictability, but continual surprise. Acknowledging that businesses need to be designed to adapt is one step toward a time-sensitive management framework in which the costs of change are not counted as extraordinary charges, but as a cost of doing business.
Managers must shift their focus from creating efficiency to building the capacity to respond to an unpredictable environment. We've developed a framework for creating the Adaptive Enterprise, which will succeed by:
- Creating - managing the rules that the people in their organizations use to make independent, empowered decisions.
- Connecting - providing individuals access to information and opportunities to recombine their insights, or re-conceiving their businesses as part of an industry ecology.
- Evolving - using new kinds of feedback from the environment to apply selective pressure their businesses, and above all, expecting continual change in their industries, business models, and organizations.
Applying the Rules of Adaptive Management
in order to better understand how specific adaptive principles can be applied to business, weive broken the organization apart into four areas: Process and Technology, Product, Organization, and Strategy. Figure 1 explains how each of the six adaptive principles might affect each of these four business areas. Below we describe how these adaptive management memes might be put into practice.
Sense, Respond, Learn, Adapt
Cheap, soon to be ubiquitous, wireless sensors make sense and respond a very attractive way to filter and act on new information. Sensors will help us to no longer rely on forecasting as we equip ourselves to sense the outside world and to respond immediately, accurately, and appropriately to environmental shifts.
Artificial intelligence is making it possible to build on sense and respond capabilities. As we receive feedback on what happened when we 'sensed and responded', artificial intelligence will help us learn from experiences, so that we can incorporate these capabilities into our responses next time. Sense, respond, learn, adapt is a process of continuous improvement.
Where could you be getting feedback that you currently are not ? How are you going to get it ? Sensors come in all varieties, from intelligent agents to real-time data feeds. No matter the method, better sensing capabilities translate to faster response time and are critical for your strategy to keep apace of the continuous changes in the marketplace.
As sensors are able to capture more data more accurately while consuming less space and energy, and as wireless networks are able to rapidly transmit large amounts of information across space and time, you will be able to capture exabytes of high-fidelity analog data on customer usage behavior and transmit that data across a wireless digital network. How can you learn from the history of responses ? And how can you better adapt to what you are learning all the time ? By retaining information and adjusting accordingly, sensors will be the ultimate sensing and responding technology.
Most organizations today are connected to other entities in their economic web and can benefit from sensing changes as they are happening. The next step down the path to the adaptive enterprise is to build the capacity to respond to these changes by creating an adaptive organization whose size, competencies, and hierarchical structure evolve with the threats and opportunities in the marketplace. in time, these responses may be generated automatically by software smart enough to learn from a pattern of feedback and to orchestrate an appropriate response. By letting the market guide your strategy, by acting on feedback, not on predictions, you can recognize and address the volatility drivers inherent to your products, markets, and relationships.
The point here is to manage businesses or any organization from the bottom up ( as organisms are built from the cells up ), focusing on influencing the levers that affect individual behavior rather than on steering the overall behavior of the organization from the top down. Computer simulation techniques, for example, are one tool that can help managers evaluate the effects and potential outcomes of changing the rules the agents use to make decisions.
Twenty years from now, leadership will be much less involved with the hands-on managing of people than it has been traditionally. The leader of an adaptive enterprise will focus on instilling the corporate values and teaching the behaviors that will lead staff to create useful order and productive methods on their own.
in a way, this gives new meaning to the term 'micromanaging'. Rather than seeking to control the minutiae of an organization's activities, leaders of the adaptive enterprise will create and continuously manage the rules that drive operations and elicit global behavior that promotes greater productivity ó rules that apply to machinery, people, and partners.
Proliferating connections ó among people, machines, and companies ó make recombination easier, which in turn fosters quicker innovation. Rapid recombination of business elements also allows companies to create diverse portfolios and to prepare themselves for unexpected changes in the marketplace.
As the rate of change increases, the value of diversity follows. When faced with volatility, the adaptive organization can benefit from diverse problem-solving approaches, knowledge bases, and modes of work. Companies in many sectors are using recombination to generate novelty and create value. A recombinant approach allows companies to rapidly adapt their products to the dictates of ever narrower customer segments, while covering a broader range of design space, and to prepare to deliver results across an array of future states ó no matter which way the market moves. When coupled with computer modelling, directed molecular evolution, and other rapid testing techniques, recombinant approaches to innovation reduce the costs of experimentation.
Diversity is particularly important for promoting creativity, and adaptive managers should maximize the opportunities for recombining ideas by providing working environments where people can 'cross paths' frequently and governance structures that favor open communication and free exchange.
Seed, Select, Amplify
Ongoing elimination of underperforming elements of the business ó business units, operations, people ó is a key task in managing an adaptive organization. With respect to people, this means conducting methodical performance reviews, applying selective pressure judiciously, and when appropriate, using forced ranking. 'Up or out' need not always imply out of the organization; it might simply mean taking people out of roles that don't suit them and moving them on to tasks that better fit their personality and skills. Beyond assigning the right people to the right tasks, this ongoing process calls for establishing competency-based roles for greater transferability of resources.
if you are in a molecule business you select and amplify literally, using bioassays to select the molecules that best meet your performance criteria, and breeding techniques for amplification of the most desirous molecules. With each iteration, the quality of the inputs increases, and the end result of each filtering process is more successful or useful than earlier stage molecules. if you are not in the molecule business, you can use these same techniques in-silico to solve your process-design problems.
For example, you can use evolutionary computer algorithms to create new solutions to complex problems, and agent-based models to simulate outcomes of policy changes, making strategy testable without risking the business or anyone's life. You can try a lot of diverse experiments, apply selective pressure, and ride your winners. Experiment, don't plan. That's how breeders make thoroughbreds.
The rate of environmental change demands rapid response. Part of this capacity to respond is the ability to tolerate periods of internal instability at times when inaction and a commitment to the status quo would spell disaster. Destabilizing a marketplace or business ecology deliberately, disrupting competitors and the entire playing field, can also be a strategic advantage if you are prepared to seize the opportunities that arise as a result.
Predictive models are no longer an effective and sustainable way to develop strategy and plan investments. The business models we relied on in the past were not designed to handle the volatility in our current business environment. instead, corporate strategists must now build capabilities that manage volatility, perhaps even create it.
One example of how you can create volatility, and use an unstable marketplace to your advantage, is by disrupting the rate at which new products are introduced in your market. Product life cycles are getting shorter and shorter, decreasing the time firms have to reach profitability. This is perhaps most visible in the high-technology arena, but it is affecting other industries as well. Companies that can cycle through the product development loop faster than their competitors, disrupting their competitors, will be able to create an unstable environment and exploit it to their advantage. Another way of profiting from destabilization is by anticipating future constraints, such as possible regulatory changes, and developing new strategies and products in advance of the implementation of the new standards. And in order to do this effectively, companies will need to have well-developed sense, respond, learn, and adapt capabilities.Enough . . ., pg. 41
This principle is about the new molecular technologies that will offer opportunities to make things 'cheaper-better-greener'.This is becoming an idea for all businesses because new technologies ( biotechnology and nanotechnology ) and materials are becoming available.
in the current economic era, an offer's value is directly related to its information intensity. The more information an offer can process, or has embedded within it, the more valuable it is. This has always been true for computers and other information technologies, but it has now become the yardstick against which every offer's value from your car, to your refrigerator, to the scale you weigh yourself on in the morning is measured. As the molecule plays the role of the bit in the next economy, it will become the unit of value on which most offers are based. Molecular technologies will allow us to engineer beyond traditional constraints, creating offers that are faster, better, and cheaper by orders of magnitude.
To create economic value from molecules is to work from the bottom up, both literally and strategically. Whether proteins, people, or products, the world operates through individual units organizing themselves. Already we are seeing products enter the marketplace that use nanotechnology to improve on existing products: sunscreens enhanced with nanocrystals, khaki pants sold by Eddie Bauer and others that use nanotechnology to make fabrics more stain resistant, and self-cleaning windows created by PPG industries and Pilkington. Nanotechnology will cause those companies slow to act to be disrupted, while leading companies will use it to extend the performance envelope of their existing products and to develop breakthrough innovations.
Business people have been adapting all along, without the benefit of a formalized framework for adaptive management. Three changes now demand new solutions. First, connectivity in the environment has accelerated change and increased volatility in the business environment. That means more rapid and varied adaptation, and fewer periods of stability in which efficiency is the dominant source of economic health. Second, we have greater understanding of the means of adaptation than ever before, so that we can articulate these management rules more precisely, implement them more systematically, and rely less on the intuition of a few gifted leaders. And third, we now have technologies that can help apply the principles of the Adaptive Enterprise.
Today, changing the rules of management requires a conscious effort. You don't have to flash cut to the Adaptive Enterprise; just start installing adaptive features ó a little Sense and Respond here, a little Seed, Select, Amplify there ó and the business will be on its way. But if the organization can become adaptive, from then on it will create and adopt the new rules on its own through the evolutionary processes we've described. Change will become natural - literally.
"You can try a lot of diverse experiments, apply selective pressure, and ride your winners. Experiment, don't plan. That's how breeders make thoroughbreds."
4 WELCOME TO THE CONVERSATiON
THE BiG iDEA
7 EMBRACING EVOLUTION: BUSINESS FROM THE BOTTOM UP
The Adaptive Enterprise is one that thrives in todayis volatile economic environment. CHRiSTOPHER MEYER and STAN DAViS introduce the new concepts for managing in times of uncertainty.
14 VALUING ADAPTABILITY: MARKERS FOR MANAGING IN FINANCiAL VOLATILITY
ERIC MANKIN and PRABAL CHAKRABARTI examine the adaptive markers of companies that fare well in the financial marketsóin spite of todayis economic instability.
INNOVATION IN ACTiON
22 THE VIRTUAL WORLD OF AGENT-BASED MODELLING : PROCTER & GAMBLE'S DYNAMiC SUPPLY CHAIN
FRED SEIBEL of biosgroup and LARRY KELLAM of Procter & Gamble explain how agent-based models were used to create a more responsive and efficient supply chain at P&G.
28 NOT ALL ADAPTiVE ENTERPRiSES ARE ALiKE
JOHANNA WOLL profiles how Capital One, the U.S. Marine Corps, BP, and Maxygen cope with continuous change.
35 CULTIVATING THE CUSTOMER: REAPING THE REWARDS OF THE VALUE CHAIN
ROBERT GRAY describes how one leading agribusiness company has addressed volatility in its industry to become better prepared to handle the evolution of the market and the needs of its customers.
A BLUEPRiNT FOR CHANGE
41 WHEN INTUITION IS NOT ENOUGH : STRATEGY iN THE AGE OF VOLATILITY
Managers have long relied on intuition to make strategic decisions. ERiC BONABEAU explains why todayis times require a more adaptive approach to decision-making and preparing for an uncertain future.
48 CREATING AN ADAPTIVE AUTOMOTIVE ENTERPRISE
The adaptive automotive enterprise replaces the old ipushi system with a demand-based customer ipulli system. FRED KUGLIN details the challenges ahead for automotive companies.
ON THE HORIZON
55 UNDERSTANDING THE ACCELERATING RATE OF CHANGE
The accelerating rate of technological change has created an entirely new way of doing business and viewing progress in the world. RAY KURZWEIL and CHRiSTOPHER MEYER converse on how to deal with an increasingly unpredictable future.
60 iN SEARCH OF THE FUTURE
The Center for Business innovation's scanning expertise creates a window into the future of business. MARK MAGGIOTTO explains how anticipating and shaping the future empowers business leaders to create their own destiny.
Perspectives on Business innovation promotes a shared conversation between business practitioners and observers. Here are some of the most provocative perspectives we have heard lately . . .
67 JAMES BOYLE ON REDEFINING PROPERTY
73 INSIGHTS AND PERSPECTIVES FROM THE INNOVATiON MANAGEMENT ROUNDTABLE
79 TECHNOLOGY WATCH
GEOFF COHEN explains how growing sensor networks will revolutionize the way companies observe and react to changes in their environment.
85 WELL-READ MANAGER
Excerpts from four reviews of Stephen Wolfram's 'A New Kind of Science' as well as a list of recommended reading.
A list of upcoming events not to be missed.
92 RESEARCH ROUNDUP
Summaries of current research projects at the Center for Business innovation.
98 iN CONCLUSiON
Economic theorists and high-tech executives predict a downturn in the New Economy will produce an equally successful "New Recession".
Christopher Meyer was the director of the Cap Gemini Ernst & Young Center for Business innovation in Boston. The Center was charged with identifying the issues that will be challenging business in the future, and defining responses to them. His own current research interests include the development of a New Theory of the Firm, the implications for management of new discoveries in complexity and self-organizing systems and the development of the "connected economy."
Chris established the BiOS Group, Cap Gemini Ernst & Young"s initiative to develop complexity-based solutions for management. He has more than 20 years of general management and economic consulting experience. With Stan Davis he co-wrote "BLUR: The Speed of Change in the Connected Economy" ( Addison-Wesley, 1998 ), "Future Wealth" ( Harvard Business School Press, 2000 ), and "It's Alive: The Coming Convergence of information, Biology, and Business" ( Crown Business, 2003 ).
Chris can be reached at Chris.Meyer@gotnerve.com.
© all material copyright CGE&Y - Center for Business innovation reprinted by permission