Crises and the "Next Big Thing"

Stephen DeAngelis

June 3, 2009

Crises are often watershed events. Through the course of the most serious crises, the strong survive and the weak die off. As we watch automobile companies struggle to survive, no one is forecasting the end of auto sales or demise of personal transportation. The best companies will survive — most likely because they are the ones best able to adapt to new circumstances. The current crisis is no different than past crises. It is forcing companies and countries to change and some of those changes could be significant. China, for example, is often pointed to as a polluter that rivals and could quickly surpass America. Keith Bradsher reports, however, that “Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, making it the world leader in electric cars and buses after that” [“China Vies to Be World’s Leader in Electric Cars,” New York Times, 1 April 2009]. What’s happening in the auto industry is a classic example of “creative destruction.” Austrian economist Joseph Schumpeter popularized the term “creative destruction” to describe the process of transformation that accompanies changes resulting from radical innovations or crises. For other examples, one need only recall how quickly handheld calculators killed off the slide rule industry or how cassettes killed off vinyl records.

Crises also cause people to reflect on what caused them and how best to mitigate their effects. That is the focus of a column by Steve Lohr [“How Crisis Shapes the Corporate Model,” New York Times, 28 March 2009]. Lohr begins his column by noting that people often look to the past for solutions to crises; but, he laments that too often they only look at “lessons learned for economic policy and theory.” He decided to look at the current economic crisis through a different lens — that of business management. He writes:

“Innovation in management, after all, is adaptive. Management is not a science, like physics, with immutable laws and testable theories. Instead, management, at its best, is an intelligent response to outside forces, often disruptive ones.”

When I started Enterra Solutions, I saw a number of disruptive forces at work that affected organizations and I believed there was a better way to deal with them. What I saw was that federal and commercial sector organizations were operating in an environment of extreme complexity. Globalization and technology acceleration had disrupted standard rules of engagement for individuals, companies, governments and transnational systems and led to an array of environmental stressors, including.

  • Physical, cyber- and application security threats
  • Intensive and ever-changing compliance and governance requirements
  • A radically accelerated pace of business
  • New forms of competition – on a global scale
  • The end of boundaries between business and technology, and between trading partners in the value chain

These stressors affect the whole organization — its ability to compete, its ability to perform, and its ability to function. They don’t fit neatly into traditional organization silos — security, compliance, information integration, or business performance improvement. Each challenge affects all of those functions — and stands as a barrier to organizational success. Organizations need to respond — but not in a traditional, siloed way. They need to respond holistically — in a way that confers more and better control, and sustainable competitive advantage. That was the driving philosophy behind my creation of Enterprise Resilience Management℠ (ERM), which enables commercial-sector organizations in critical infrastructure industries such as financial services, health care and life sciences, and utilities, as well as federal-sector national security and critical infrastructure agencies, to sense their environment, detect changes, and respond as a whole to compliance challenges, security threats, natural disasters, and fast-moving competition.

Lohr’s point is that past stressors have led to similar changes in business models and approaches. He writes:

“The [Great] Depression and its immediate aftermath … was … a catalyst for forces already in motion. The main development, they note, was the rise of the modern multidivisional enterprise like General Electric, DuPont and General Motors. It was made possible by the mature technologies of transportation and communication — railroads, the telephone and the telegraph. The technologies made it possible to monitor and coordinate business operations as never before. And the Depression made it imperative for managers to achieve efficient economies of scale to tap national markets, ensuring corporate survival amid a downward spiral in total demand.”

I believe that Enterprise Resilience Management™ moves the vector of history forward using the latest available technologies. Lohr also believes that current events are about to move the vector of history forward and he focuses on the views of John Hagel III, the co-director of the Deloitte Center for Edge Innovation, a research arm of the consulting firm. Hagel believes that companies are about to “unbundle.”

“Most companies, he says, are actually bundles of three different businesses: infrastructure management, product and service development and commercialization, and customer relations. The current crisis, Mr. Hagel says, opens the door to ‘an unbundling of the corporation’ to achieve greater efficiency and profitability. The trend, he notes, is already exemplified by specialist companies that focus on particular infrastructure fields. In logistics, Mr. Hagel says, many companies farm out those chores to Federal Express and U.P.S.; in call centers, he points to Convergys; and in contract manufacturing, to Flextronics. Of the three business areas, new product development is the one that lends itself not to size, but to small creative teams, and thus is the most difficult for large corporations. Mr. Hagel cites Procter & Gamble as a big company that understands the benefits of unbundling. It has set a goal of getting half its new-product innovations from outside the company, through licensing and collaboration with partners. And P.& G., Mr. Hagel says, has invested heavily in Web technology and clever software to analyze and nurture customer relations.”

I have written about this kind of “open innovation” before (see, for example, my post entitled Looking for the Next Big Idea). Hagel believes, as do I, that new technologies will “allow companies to organize and manage their activities in new ways.” Although, I’m not as sure as Hagel that unbundling is the next big thing. Lohr reports that other changes may come about as a result of the current recession. He continues:

“Manufacturing innovations and distribution patterns have been powerfully shaped by economic shifts. Japan’s just-in-time, lean manufacturing system, management experts note, was an adaptation to postwar poverty, a shortage of capital and scarce land for factories, while pro-market policies in China and India opened the door to globalization. There may well be a different pattern of global production and distribution when the world economy emerges from the current crisis, says George Stalk, senior adviser to the Boston Consulting Group. Assuming that long-term oil prices average $80 a barrel or so, and that roads, ports and airports continue to be congested, smaller factories closer to home — in the Midwest or Mexico, for example — may be more economical and flexible than those in Asia. ‘For a lot of goods, China will no longer be the preferred source,’ Mr. Stalk said.”

I have referred to this trend as “regionalization within globalization” [see my posts The Future of Emerging Markets, Globalization’s Progress — Slowed or in Retreat?, and Innovations from Emerging Market Economies]. Lohr goes on to note that radical changes also have social repercussions (like the rise of trade unions and the emergence of the middle class). They have also affected how governments and businesses relate to one another. The current crisis, Lohr indicates, may change how businesses view themselves.

“Today, the pendulum is swinging back to a model in which corporations will be regarded more as social organizations, whose obligations extend well beyond Wall Street, according to Rakesh Khurana, a professor at Harvard Business School. He says that in seeking government aid, the automakers portray themselves as ‘pillars of their communities and pillars of American manufacturing, not purely economic entities.’

“‘The narrative for corporate America has changed,’ Professor Khurana observed. “Government is not seen in opposition to the firm, but as a partner.’ Such swings, it seems, are the norm historically. ‘If there’s an ideology of management,’ he said, ‘it is pragmatism.'”

As I discuss Development-in-a-Box™ with political and business leaders in emerging market countries, I stress both the practical aspects of public/private partnerships and the social benefits of supporting businesses that can help transform societies for the better. I also tell them that they should first look at strengthening industry clusters in which they have natural advantages and can make them more regionally competitive. Following recovery from the current economic crisis, countries and companies that believe they can operate the same way they did before the crisis began are likely to be surprised — and not in a good way. History continually teaches the lesson that organisms and organizations must adapt and change in order to survive.