Embracing Change

The greatest danger in times of turbulence is not the turbulence — it is to act with yesterday's logic.

Peter Drucker

Today's interconnected, global economy is characterized by turbulence. Markets are volatile, supply chains are increasingly vulnerable, and disruptions can substantially affect shareholder value. Major disasters, be they natural or caused by humans, can occur unexpectedly. Even minor incidents such as a local power failure can cause significant financial losses. Emerging pressures such as climate change and urbanization will only intensify the potential for extreme events and business interruptions. At the same time, these shifting conditions are opening up new market opportunities.

The word turbulence suggests a river of change, constantly in motion, with many waves and eddies both large and small, slow and fast. That largely describes today's business landscape. Steering an enterprise through this turbulent environment has become an exercise in alertness and rapid adaptation, akin to white-water rafting, and the waves of change are coming faster and harder. It's enough to keep any company executive awake at night.

What are the options for companies to cope with turbulent change?

• Resist change by hardening defenses and trying to maintain stability.

• Anticipate change by preparing for disruptions based on experience and foresight.

• Embrace change by designing an organization that can adapt to unforeseen challenges.

The premise of this book is that to succeed in the face of turbulence, enterprise managers will need to anticipate and embrace change rather than resist it. The problem is that we still tend to cling to a belief in stability as the normal state of affairs. When a disaster strikes, such as a hurricane or a terrorist attack, our instinct is to overcome the shock, assist the victims, and return to a stable equilibrium as soon as possible. But what if the quest for stability is futile? Faced with a turbulent business environment, our best strategy may be to plunge in, accept change as the new normal, and improve our capacity for rapid response and adaptation. To ride the waves of change, companies need to become more resilient. They need to be prepared for unexpected events and bounce back quickly or, better yet, "bounce forward" by improving their competitive posture.

Turbulence is a consequence of many shifting forces, including cultural, political, technological, and environmental changes. These forces can be divided into two major types:

1. Gradual stresses include population growth, climate change, urbanization, mobile device proliferation, and the rising income gaps between the poor and the wealthy. Some types of gradual change, such as metal corrosion or sea-level rise, may not be recognized until severe consequences become evident.

2. Sudden shocks include hurricanes, tsunamis, industrial accidents, power failures, economic collapses, terrorist attacks, and political upheavals. In some cases, a small-scale disruption, such as a facility structural failure or a regulatory policy change, can trigger a chain of events that develops into a crisis.

Any of these forces alone would be challenging to cope with, but when they occur simultaneously and interact with one another, the challenges can seem overwhelming. A potent example occurred in 2013, when Superstorm Sandy pounded the northeastern coastline of the United States, which has gradually become more vulnerable to flooding due to rising sea level. As a result of this storm, much of the New York coast and New Jersey lost power and water service for weeks, and economic losses totaled about $70 billion. Our traditional management tools, such as risk analysis, are inadequate for understanding or predicting the collective effect of these complex forces on a business enterprise. Catastrophic disruptions that arise from an interplay of stresses and shocks are difficult or impossible to forecast with any confidence.

Experience has shown that business enterprises tend to lose their resilience as they grow and mature. They become vulnerable to surprises and slow to recover from disruptions. Companies that emphasize stability may cling to outmoded practices and proven technologies, may fail to question their assumptions, and may have blind spots that hamper their recognition of external change. As a consequence, they are unable to react to external challenges until they reach a state of crisis and require a drastic intervention.

On the flip side, companies that embrace change are better positioned to identify and seize emerging opportunities more nimbly than their competitors. Today, innovative companies such as Dow Chemical, IBM, Unilever, and Royal Dutch Shell have begun to view resilience as a source of competitive advantage. They are supplementing their traditional risk management processes with continuous monitoring of external situations and strategic capabilities for agility and adaptation. Like skilled athletes, these companies strive to operate at peak performance while being alert and prepared for emerging challenges. As a consequence, they are able to thrive in a constantly changing environment, discerning opportunities and consistently building shareholder value.

Despite the turbulence around them, resilient companies find a way to survive and prosper. They accept the inevitability of surprises and are able to adapt gracefully, sometimes transforming their very structure. In the words of Andrew Grove, former chief executive officer (CEO) of Intel, "Bad companies are destroyed by crises; good companies survive them; great companies are improved by them."

The New Normal

Crises are becoming more commonplace than ever. The giant reinsurance company, Munich Re, reported that there has been a sharp increase in the number of natural catastrophes since 1980, a trend that has been linked to climate change. Other destabilizing pressures include rapid urbanization, resource depletion, and political conflicts. As our planet's systems become more tightly coupled and volatile, the incidence of "black swan" events seems to be increasing. Aside from natural disasters, we are increasingly confronted with unexpected technological failures, including infrastructure collapses, power failures, and ecological crises such as BP's Deepwater Horizon oil spill of 2010 in the Gulf of Mexico.

Perhaps the greatest stress factor is the increasing complexity and connectivity of the networked global economy....