The World Is Turning Upside Down

The World is Turning Upside Down

This article examines the challenges facing leaders of enterprises, whether commercial or not, when the world is turning upside down.

For ease of reference, this is structured under the following headings:-

• The business environment is changing rapidly
• The ubiquity of technology is transforming business landscapes
• Mindset is everything
• Challenges for leaders of enterprises
• The need for Information Leaders
• Conclusion

The Business Environment is changing rapidly

The external environment for all enterprises is rapidly changing fuelled by possibilities generated by technology particularly digital technology and increasing information processing power. Technologies in themselves change nothing. It is what people do with the technology that is transforming enterprise’s landscapes. Fire existed for millions of years but it was only when human beings started using fire to change their environments that transformed most landscapes. The existence of the internet, faster processing and ubiquitous availability of increasingly more powerful microprocessors in themselves change nothing. It is when people create the World-Wide Web, interact through social media systems and include processors in their products and services that is truly transformational.

Disintermediation is occurring at a rapid pace. Woolworths went bankrupt and more recently two major high street chains went into administration. These high profile business failures represent just the tip of the iceberg. This is the realisation of a trend that has been occurring for decades that is being accelerated by different social patterns, changing economics and the ready provision of digital alternatives.

Rob Wirszycz graphically illustrates this in a simple model shown below.Rob was the ex-leader of the IT Trade Association and is now the Chairman of several innovative digital start-up companies. The left-hand side represents the older service models and the right-hand side shows the new emerging service models. The top shows those services that are primarily driven by human interactions. The bottom shows those services that a predominantly driven by data.

The 20th Century business landscape was dominated by full-service models where a particular enterprise sought to provide a full service to its customers in its sphere of activity. This is the thinking behind ‘owning the customer’. Examples would include retailing chains, TV broadcasters, manufacturing and financial services. We shopped at department stores, bought cars from the forecourt and paid-in at banks.

There was always an element of self-service. Indeed the move from shops to supermarkets was an illustration of this trend but this was a just small element of the service offering. Project services would include consulting assignments, IT systems development and installations, and, primarily one-off services bought-in from outside the organisation. Custom services were also available primarily to well-off individuals and organisation where the service and products were tailored to the buyer. These would include strategic consulting, bespoke developments and high-end products such as prestige cars.

The new service framework shows the dis-intermediation of traditional aggregator businesses. Full service models are being replaced by either self or automated services, or, custom services. Many of us do our banking online. We expect standing orders and direct-debits to be actioned correctly. We buy books online and watch TV through internet players that allow us to time-shift. Furthermore, we expect most of these automated services to be free perhaps paid for by advertising or the provider earning from the use of aggregated behavioural data.

This bifurcation between data and people powered services is set to continue.

There is no Law of Diminishing Returns in digital products and services. To make an extra car, we need the raw materials, labour, factories and distribution. To use an extra version of a computer programme or digital media costs the supplier nothing. Once a server is linked to the web and customers access the service through consumer devices, the additional cost to the supplier is zero!

Cloud computing, the general availability of the word-wide web, mobile devices and good electronic communications is enabling different forms of business and making significant impacts on how we do business and even how we live. It is arguable whether the ‘Occupy’ movements or the ‘Arab Spring’ would not have had their impacts without the support of digital communications technologies. Already, 30% of the world’s population subscribe to broadband services!

Cheaper near field communications (NFC) technology that powers our payments (Oyster cards, smart credit cards) will enable a transformation of consumer businesses. Already three dimensional printing can allow consumers to print parts for and construct a gun. Such technologies will, when economics allow, untie our need to manufacture in specific locations.

The ubiquity of technology is transforming business landscapes

The average family car has over 200 microprocessors controlling all aspects of its performance. Our broadcasters produce, edit and play-out their offerings using digital technology. Many of us have not visited a bank branch for years but instead use online banking to conduct our financial affairs. In 2012, the UK revenue from computer games exceeded the total of cinema receipts. We book our holidays, renew our insurance and even search for our next home using the Internet.

Government has not been slow in embracing the Internet. We can apply for visas online. We can submit our tax returns via the Internet. We can pay our traffic fines. Apply for passports and submit petitions for consideration by Government, all online.In fact the government would much prefer it if all tax returns were submitted online – easier to collect and much less scope for errors caused in data copying. My prediction is that the option to do tax returns on paper will disappear before long, but some scheme would be set up to allow people who genuinely cannot cope with the technology to get help from people who can input the data for them.

Imagine what would happen if we lost all microprocessors through a neutron bomb detonating or a major solar flare. Our transport system would not run. Our infrastructure services would grind to a halt. Most of us would not be able to work. Even if we stayed at home, our entertainment services would not be available. We could not talk on mobile phones. That is the ubiquity of digital technology!

Digital technology is transforming business models too. An example is Rolls Royce with its Trent engine. Traditionally, engine manufacturers made money through supplying spare parts. With the Trent engine, Rolls Royce transformed the market place. How did they do it?

The Trent engine transmits 2 Mbytes of data to one of five receiving centres in the world. Rolls Royce engineers are able to monitor the performance of each engine and can direct replacement parts and organise defect maintenance at the aeroplane’s next stop. Instead of charging for spare parts and expertise to repair, Rolls Royce’s business model is to charge for each mile the aeroplane is in the air. It is in Rolls Royce’s interest to keep planes flying thus aligning their interests with the airlines. This transformed the business model for engine suppliers with GE and Pratt & Whitney still playing catch-up.

Digital businesses are out-competing some traditional businesses. It is no accident that brands like Blockbuster and HMV have entered administration. Their ‘bricks and mortar’ business models are being undermined by Apple’s iTunes and Google Play that offer digital media for download. Amazon has become the largest book retailer in the world without having a physical high-street presence. IBM has moved away from being a hardware company to an organisation offering services and technology innovation. PayPal has a significant proportion of the payments market.

Many traditional organisations are finding their data on customer behaviour has value. Tesco sell aggregated information on customer behaviours and it is a significant contributor to their profitability. Most B2C organisations monitor trends on social networks and this data also adds to insights on customer behaviours.

Since most organisations use computer systems to run their basic operations. These systems have data logs that can be analysed to yield further customer insights. The largest library in the world, The US Library of Congress has 836 miles of shelves housing over 152 million items. The computer data stored on the World Wide Web is expected to hold by 2015 the equivalent of 700,000 Libraries of Congress worth of data in computer readable format. This has led to the growth of Big Data where analytical techniques are applied to ‘mine’ this data.

Revolution in data analytics and techniques such as used by IBM’s Watson computer that won ‘Jeopardy’ is opening new opportunities. The New York Police are using a Watson derived ‘intelligent’ system to allocate beat officers to areas of highest likelihood of crimes. This has reduced the incidence of robberies and muggings by some 30%!

All this technology is well and good but are we in a position to exploit it?

Mindset is everything

Imagine you are the leader of a small village say three to four thousand years ago. You have about 20 families and up to 50 people relying on you. Furthermore, you believe in gods, spirits and veneration of your ancestors. Now suppose suddenly you find people are falling ill from vomiting and diarrhoea. What would you do as the leader?

In your world-view or mindset, the obvious response is that you have offended the gods, spirits or ancestors in some way. So, you propitiate them with sacrifices and more prayer. The last thing you would think of is to move the toilet pits away from the water supply!

Our mindset constrains our actions. The way we tackle issues and the solutions that we formulate depends on the way we look at the world. This is also true of how we view organisations. I would like to introduce two concepts that might be useful for thinking about organisations as socio-technical systems.Is it worth saying here that the idea of socio-technical technical systems is not a new one, but the recent developments demand a new type of socio-technical system.

A Newton system is one that is designed to operate in a fixed way. Like the old mechanical clocks, a Newton system requires each part of it to work in a fixed relationship with other parts. So, if you take a clock and a cog-wheel breaks. You must replace it with a part that is exactly the same. Would a clock work if you replaced a 5cm diameter cog with a 6cm one?

The characteristic of a Newton system is that the parts operate in relation to other parts in a fixed way. If one component is removed then, the system does not work. Newton systems can be incredibly complex and efficient but are extremely resistant to change.

In direct contrast, I would like to introduce the concept of a Darwin system.

In 19th Century Britain, the forest ecosystems supported a small rodent that ate fruits and gathered nuts. This was the Red Squirrel. In the late 18th Century, some wealthy landowners brought over its cousin, the Grey Squirrel. Now Greys are about a third bigger, much more aggressive and tougher than the native British Reds. Some of these animals escaped and now you will find in Britain Greys predominate. Apart from protected populations in the New Forest, Anglesey and the North of Scotland, all squirrels in Britain are Grey.

Yet the forest ecosystems did not collapse. The Greys supplanted the Reds in the forest ecosystem. Woodland species adapted around the Greys. Yes there were subtle shifts in predator prey relationships. Weasels probably found it harder to kill Greys but the Greys took over the role of spreading plant seeds. The forest adapted.

A Darwin system is one that is able to adapt to changes in its parts or in its external environment.

Clearly, these two distinctions are a continuum when we apply it to organisations. An example of a Newton system would be Call-Centres where the operator’s actions are prescribed by scripts and IT systems. At the other extreme we have self-organising enterprises along the lines of and perhaps going beyond Wikipedia and the Open-Source movement.

Newton systems are not always bad nor Darwin systems always good. It really DOES depend on the situation. I would want a nuclear power plant to be run as a Newton system and not reliant on the whims of individual plant operators. On the other hand, creative organisations such as copywriting or design work better as Darwin systems.

My contention is that the way we view enterprises is based on a 20th Century mindset tending towards a Newtonian model. Newton systems may well be efficient but they cannot adapt quickly. Any change in process requires careful redesign. Implementing change is just a nightmare.

If we are right that most business environments are changing fast and the span of foresight is getting less, then this may be a problem for us all. Span of foresight is the length of time ahead that one can predict accurately and with confidence what will happen. In the 1980s most businesses had a span of foresight of 5 to 7 years but now few businesses have a span of foresight more than 12 months. Few large organisations are Darwinian. Yet, our expectations of work, even our career planning is predicated on Newtonian organisations that will struggle in the new business landscape.

Challenges for Leadership

We all know that leadership is situational. However, when we talk about leadership in organisations, the prevailing zeitgeist is the power hierarchy. We expect bosses to plan, direct and control business activities. The way we talk about the workplace, the systems in use to control organisations and even our assumptions about the role of the leadership team is based on the power hierarchy.

The power hierarchy predicates the activities of the enterprise to be organised within silos. These may be market-based as in Regional Divisions or Product Divisions or Market-sector Divisions. Often they are supported by other specialist silos such as the Finance, Human Resources or IT Directorate. This view of organisation can be characterised by the following diagram first popularised by Michael Porter author of “Competitive Advantage” in the 1970s.

This is fine when the enterprise’s environment is predictable and strategies can be formulated to meet identified opportunities and threats. It is also assumes that the plan, execute and review cycles work. The focus of the power hierarchy is control against a set plan.

But, what happens if we cannot predict accurately? Most enterprise’s span of foresight is shortening. Unlike the previous Century where leaders had the luxury of foreseeing five to seven years ahead, current leaders’ span of foresight may be as short as months.The fundamental problem with the span of foresight being much shorter than your change in systems and processes can cope with is that you are in danger of producing products which are just right for a world in which they no longer fit – arguably this is what is happening to BlackBerry right now

The power hierarchy is in my terms a Newton system. While Newton systems are efficient at achieving their designed purposes, they are difficult to change. Similarly, power hierarchies may be extremely efficient but do not foster innovation. This difficulty might be circumvented by creating ‘skunk works’ organisations within the enterprise (e.g. Lockheed with the Stealth Fighter and IBM with the PC) but the very nature of the power hierarchy mitigates against innovation.

In the future service world as envisaged by Wirszycz where the ability to innovate and exploit the technological changes become a premium, the power hierarchy will inevitably struggle. The only way out to preserve such cultures is to find markets segments where the environment is predictable and span of foresight is long

Another issue for leaders to address is the changing nature of customer behaviours due to the impact of social digital media. No longer can enterprises hide behind a Public Relations image that is carefully crafted by PR specialists. Problems can go ‘viral’ in a few hours rather than weeks and any enterprise that believes it can ‘keep a lid’ on poor customer experience is living in fantasy.

The customer is also changing. Enterprise leaders are predominantly Baby Boomers who are at best digital tourists. Generation X is now moving into leadership positions but they are at best digital immigrants. We have a generation moving into the workplace who are digital natives that have grown up with digital technology. This Millennial generation have different behavioural employees, characteristics and solve problems in different ways. The Pew Report characterises such differences.