Business and complexity

April 9, 2013

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Up to now, we have seen the world around us as systems that, we thought, could be described and understood by identifying rational causal links between things: if I choose X, then it will lead to Y. If, on the other hand, I choose A, it will lead to B. We are accustomed to drawing boxes and arrows between those boxes. We try to model the world as predictable processes based on knowing how things are and how they will be. We want to be certain, and we think we are.

Management thinking is based on the sciences of certainty. The whole system of strategic choice, goal setting and choosing actions to reach the given goals in a controlled way depends on predictability. The problem is that this familiar causal foundation cannot explain the reality we face. Almost daily, we experience the inability of leaders to choose what happens to them, to their organizations – or to their countries. Things may appear orderly over time, but are inherently unpredictable. We live in a complex world.

Complex systems are, as their name implies, hard to understand. Social systems, like organizations consisting of people, are accordingly complex and hard to understand. There is no linearity in the world of human beings. There are no arrows and people are not boxes, or fit inside of boxes. This is why our thinking needs to develop from the sciences of certainty to something more applicable, the sciences of uncertainty, the sciences of complexity.

Complexity refers to a pattern, a movement in time that is, at the same time, predictable and unpredictable, knowable and unknowable. Chaos theory explains how these patterns form. A parameter might be the flow of information in the system. At low rates, meaning no input or more of the same input, the system moves forward displaying a repetitive, stuck behavior. At higher rates and more diversity the pattern changes. At very high rates the system displays a totally random behavior. The pattern is highly unstable. However, there is a level between repetition/stability and randomness/instability. This level where simultaneous coherence and novelty are experienced is called the edge of chaos.

Classical physics took individual entities and their separate movement (trajectories) as the unit of analysis in the same way we have analyzed and rewarded individuals. Henri Poincaré was the first scientist to find that there are two distinct kinds of energy. The first was the kinetic energy in the movement of the particle itself. The second was the energy arising from the interaction between particles. When this second energy is not there, the system is in a state of non-dynamism. When there is interactive energy, the system is dynamic and capable of novelty and renewal.

Interaction creates resonance between the particles. Resonance is the result of coupling the frequencies of particles leading to an increase in the amplitude. Resonance makes it impossible to identify individual movement in interactive environments because the individual’s trajectory depends more on the resonance with others than on the kinetic energy contained by the individual itself.

We are the result of our interaction. We are our relations.

The conclusions are important for us: firstly, novelty always emerges in a radically unpredictable way. The smallest overlooked variable or the tiniest change can escalate by non-linear iterations into a major transformative change in the later life of the system.

Secondly, the patterns are not caused by competitive selection or independent choices made by independent agents. Instead, what is happening happens in interaction, not by chance or by choice, but as a result of the interaction itself.

The new social technologies have the potential to influence connectivity and interaction as much as the sciences of complexity are going to influence our thinking. The task today is to understand what both social business and complexity mean. The next management paradigm is going to be based on those two, at the same time.

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John Hagel on “harnessing the power of randomness” and “resilience

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Last week I met with executives from large traditional manufacturing firms. They asked me what the ideas of social business might mean for them. What kind of changes might be ahead?

There is a saying that without customers, you have no business being in business. Accordingly, customer focus has been the dominant idea in business since the 1960s. Businesses have focused on customers as an audience for products, services and marketing messages.

But unfortunately, many businesses consistently miss the big shift: customers have transformed from an audience to actors. Firms don’t create value for customers. The way customers use the products and services creates value. It is a process of co-creation, not consumption. There are no consumers any more!

Many troubled companies still focus mainly on the wrong things. Their turnaround efforts don’t typically involve the customer. Managers streamline the businesses mainly through cutting costs; they re-engineer the internal processes to make them more cost-efficient. But they regularly leave out the most important part of the equation. They don’t start from the outside, the customer, and work in. They don’t create customers first. Instead, they work from the inside out. Many of these initiatives save money, but don’t affect the revenue side.

There is a revolution going on at this very moment as a result of the new interactive tools and social platforms. Every organization, no matter how big, now has for the first time the ability to interact directly with its end customers. Every company has the potential to consolidate customer insights and to gain a much better picture of who its customers are, how customers use the products, which products they discuss, and where they discuss them?

The problem for many traditional businesses is the definition of who the customer is. The real customer for any business is the end user of the offering, the person or company who uses the product, not the ones who distribute the product to the user or even, necessarily, the ones who pay for it. If your actual end customers don’t value your product or service, sooner or later you’ll be out of business. The length of time it takes for customer dissatisfaction to put you out of business depends on the number of steps, the degree to which you are away from direct customer contact.

This was one of the main concerns that the executives raised in our discussions.

Many companies I met had delegated customer interaction to their distribution channel as part of the overall value chain set-up. Very often the distribution channel “owns” the customer in exchange for the services given. The problem here is often letting that channel withhold information about customers as part of the trade-off.

In most markets, the demand for a direct relationship between producers and customers becomes more and more intense as the channels of distribution become shorter and more varied.

The marketing and sales departments used to be the customer’s proxy, with the exclusive role of interpreting changing customer needs. Social business necessarily transforms the marketing function and sales specialists by formally integrating the customer into every part of the organization.

The customer of tomorrow interacts with, and should influence, every process.

For routine retail transactions, as we have known them, such direct customer influence may seem all but impossible. But improvements in interaction technologies and companies’ ability to handle big data, and customer-specific small data make it feasible to claim that the number one thing shaping the performance of the traditional manufacturing enterprise is the interactive capacity between producers and customers.

The good news is that I have seen a new breed of executives coming to power. The people I meet are technology-literate. They are not only the early adopters of the next hot gadgets. They are pragmatists. They are frustrated by antiquated information and CRM systems, firewalls and organizational silos that get in the way of streamlining customer-facing business processes. “There are no back offices any more”, said one of the executives. “All processes need to be customer-facing in order for us to be competitive and serve the new active customers.”

The Internet is not a simplistic agenda reserved for the Internet companies any more. Perhaps we should accordingly stop talking about social business. The timing is now right for those leaders who are willing to doubt accepted wisdom regarding how things are done and are prepared to experiment and interact with their customers in new ways.

“There is no business without rich customer interaction,” as one executive put it.

In the end it is about being closer to things that matter.

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Thank you Tore Strandvik

Developing more effective systems of digital engagement.

Lean and social

October 2, 2011

Waste seems like a straightforward term, but lean thinking has given new meaning to the word. In lean vocabulary, anything that does not create value, slows one down, or does not contain potential for learning is waste. A thing or a document sitting around waiting to be used is waste. Making something that is not needed is waste. Unwanted movement is waste. Transportation is waste. Waiting is waste. Any extra processing steps are waste.

The concept of waste has lately been transferred from manufacturing to other practices such as product development. According to lean principles, when a development project is started, the goal is to complete it as rapidly as possible. In a sense, ongoing development projects are just like inventory sitting around in a factory. Design and prototypes are only valuable when (paying) customers are involved.

Eliminating waste is a fundamental lean principle. Thus three of the steps towards implementing lean development are learning to see waste, uncovering the sources and eliminating them.

We recently studied the product development methodology of a large multinational company. They have been very successful in the past, leading in most of the markets they have entered. But lately, many people have voiced concern that there have been unnecessary delays in getting new products to market. To find out why, we gathered input from managers and ecosystem partners.

A division into two main areas of concern developed: technology/process and social interaction. We asked people what percentage of the barriers to faster time-to-market might relate to the technology/process side and what percentage would be on the social interaction side. The answers were almost unanimous: over 75 percent of the reasons for slow product development were on the social interaction side. The results were alarming because in this organization almost all approaches to being more agile and to taking waste out of the system were historically on the technology/process side.

People are used to lean thinking when it comes to technology and processes but it is still very rare to look at taking waste out of communication. Many managers still trivialize the power of conversation. They think that social interaction issues are soft compared to the hard issues of technology and process.

We still don’t understand that work is communication: we live and work in a network of conversations. Being lean means understanding that conversations are never neutral. They always affect the quality and pace of the outcome. Communication either accelerates or slows down. Communication either creates value or creates waste. Communication can create energy and inspiration or take energy away and reduce inspiration.

The world around us is changing. The interactions in mass manufacturing were very different from the interactions in complex, dynamic, knowledge-based work. Many managers possess the skills that meet the challenges of static conditions. Those conditions are based on predictability and systems thinking, meaning that the crucial variables are known in advance. The main risk factor is then the accuracy of the predictions.

In a static environment, you know how each role fits within the larger system. You know how the processes work, and you don’t want deviations. You know what it takes to make the products and you don’t want people experimenting and making things up. You want everyone to do their part and not get in each other’s way. Roles and organizational units are separated from other roles and other units. You, as a manager, do the coordination and share the information necessary for each to make their planned contribution and nothing more.

In dynamic business conditions the management practices described above are not only unhelpful but cause damage and create waste rather than value.

If you cannot predict you have to invest in real-time learning and iterations instead of more predictions. Success is based on speed of learning and responsiveness. Responsiveness is not possible if you are many handshakes away from the things that you should respond to. Learning is then based, not on teaching materials, but on conversations linking interdependent people. The question is what the design of a valuable conversation is? We spend countless hours attending meetings and sending/answering emails, but the nature of those hours goes unexamined. Many people think that a conversation is inherently valuable. That is not the case. The challenge we face is to deepen our awareness of how conversations create either value or waste. The goal is not just to be more social.

The agile manifesto points out that individuals in interaction are more important than processes and tools. Working prototypes are more important than documentation. Customer collaboration is more important than contracts and most importantly responding to change is more important than following a plan. Creating value or waste is a result of how we interact.

We need to embrace change, unpredictability and complexity as inescapable constants in all product development. It is about being lean and social!

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Thank you Craig Larman, Petri Haapio, Ari Tikka, Mickey Connolly, Vasco Duarte and Ken Schwaber

When coordinated behaviour takes place without the intervention of a regulating authority, we often attribute the coherent action to the existence of values and ethics. We tend to think that the existence of a strong value base means that less or even no regulation is needed. A decay of values conversely means that rules and regulation are needed.

A game theory approach to values assumes that people choose the kind of behaviour that gives them the highest expected benefit over time, given their expectations about what the other players will do and the rewarding or punishing feedback they get as a result of their own actions. Players learn by trial and error, keeping strategies that work and altering the ones that turn out badly. Players always observe each other. Those with a poor performance often tend to imitate those who are doing better. What has worked is likely to be used again.

In most games who wins and who loses is the whole point of playing. It would be hard to imagine a more unpopular outcome in the reality TV-series that today are watched by millions, than an announcement that all the players ended up as winners! It is, of course, beneficial that the place of the lazy, the incompetent, and the unmotivated is taken by better-motivated and more enterprising players.

Competitive games require rules to prevent players from cheating. Competition should be as fierce as the existing laws allow, we think. Any ambiguity in the regulations is immediately exploited. This is where our thinking does not serve us any more. Innovations by the players often make existing rules obsolete and call for new ones, as we have recently experienced in the financial markets. The present relationship between regulators and financial institutions is a competitive game in itself. Instead of a home audience watching, here we have the markets watching. The principle is the same.

There are also other growing problems with the games we play. In competitive games, there is always a lack of appreciation for the need of complementarities. You are supposed to manage without help from others. As a result of competition which excludes, diversity is reduced in the system that the game is played in. There are also more losers than winners in our games. Losers multiply as winning behaviours are replicated in the smaller winners’ circles and losing behaviours are replicated in the bigger losers’ circles.

As losers are excluded from the game, they are not allowed to learn. The divide between winners and losers grows constantly. This is why, in the end, the winners have to pay the price of winning in one way or another. The bigger the divide, the bigger the price that has to be paid. The winners end up having to take care of the losers, or two totally different cultures are formed, as is happening in the big US cities today. Psychologically, competitive games create shadow games of losers competing at losing.

The games we play have been played under the assumption that the unit of survival is the player, meaning the individual or a company. However, today the reality is that the unit of survival is the player in the game being played. Following Darwinian rhetoric, the unit of survival is the species in its environment. Who wins and who loses is of minor importance compared to the decay of the (game) environment as a result of the competition.

We need a new concept of the game

In games that were paradoxically competitive and collaborative at the same time, losers would not not be eliminated from the game, but would be invited to learn from the winners. What prevents losers learning from winners at the moment is our outdated zero-sum thinking and the winner-takes-all philosophy. In competitive/collaborative games the winners would be all those whose participation, comments and contributions were incorporated in the development of the game.

The most important reason why we need a new concept of games is because the players and their contributions in the real world are, at best, too diverse to rank. They are, and should be, too qualitatively different to compare quantitatively. In competitive games the players need to have the identical aim of winning the same thing. Unless all the players want the same thing, there cannot be a genuine contest. Zero-sum games were the offspring of scarcity. In the era of creativity and abundance, new approaches are needed.

In competitive/collaborative games the approach to rules is very different from before. The rules should be created, agreed upon and changed by the players themselves as the game continues. As there absolutely cannot be pre-existing rules for every conceivable situation that might arise, we have to move beyond seeing the players and the rule-makers as separate parties. The games are too complex to be governed totally from outside. We desperately need values-based participation as a prerequisite for taking part.

The players have the responsibility not only for adhering to the existing rules, but also for developing the rules further – specifically when the game (environment) decays as a result of the actions of the players.

The criteria for success in competitive games do not lie solely in winning but in the development and continuation of the game itself through collaboration.

Thank you Fons Trompenaars and Robert Axelrod

Background

Situational values or sustainable values.

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