THE RESILIENT ORGANIZATION

How Adaptive Cultures Thrive Even When Strategy Fails

By LIISA V, #196;LIKANGAS

The McGraw-Hill Companies, Inc.

Copyright © 2010 The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-166366-3

Contents

Preface: A Note on Personal ResiliencePart One: Why Resilience Now?Chapter 1: The Newly Fallen World Rising: Resilience ReformChapter 2: Fallen Eagles: Bet on Resilience, Not on StrategyChapter 3: Parts More Resilient than the WholePart Two: Step 1. Managing the Consequences of Past PerformanceChapter 4: Performance TrapsChapter 5: Case Study: Innovation Trauma and ResiliencePart Three: Step 2. Building Resilience into the OrganizationChapter 6: Why Leadership Matters, but It Is Not SufficientChapter 7: Resourceful, Robust, and Adaptive: The Building Blocks of
Organizational ResilienceChapter 8: Sisu: Resilience as Inner StrengthChapter 9: Case Study: Resilience in Action—Building Reservoirs for
ChangeChapter 10: Case Study: Imaginative Thinking in Action—The Case of the
ODDsters at AT&TPart Four: Step 3. Rehearsing a Culture of ResilienceChapter 11: Postcard No. 1 from the Silicon Valley, California: For the
Love of It!—The Resilience of AmateursChapter 12: Postcard No. 2 from Hanover, New Hampshire: “We Want Our
Country Back!”—The Emergence and Resilience of Open OrganizingChapter 13: Postcard No. 3 from San Jose, California: Tempered Radicalism
and Management Practices That StickChapter 14: Postcard No. 4 from Woodside, California: The Challenge of
Inventive Experimentation to Management Research—Or, Who Is Responsible
for Developing New Management Practice?Conclusion: Bridging the Resilience GapEndnotesReferencesIndex

Excerpt

CHAPTER 1

THE NEWLY FALLEN WORLD RISING: RESILIENCE REFORM

In the past, a call for resilience was an implied invitation, howeverpersuasive, for crisis-free transformation. In contrast, today, as we aretoddlering out of the deepest economic crisis since the 1930s’ Depression,resilience has taken on an altogether new urgency, and the term must also gainnew meaning. In this new world, resilience will again come to mean thecapacity to survive the long term—not only its hardships but, moreimportantly perhaps, also the temptations to act for short-term benefit. Many anopportunity still looms. The question is how to pursue these opportunities, thistime with resilience. We cannot and should not forgive ourselves for missing anopportunity for resilience reform—a rethink of what constitutes somethingworth building and something worth defending, fighting for—whether it isfor our children and grandchildren or for our sense of life purpose and ourconsciousness. A reformation of the kind that took place in medieval Germany isneeded: a rethink, not so much of what makes a good person (as per MartinLuther’s theses) but what makes a good, resilient organization. Resilienceprinciples need to replace the fallen eagles.

The past half-century, a period of extraordinary economic growth has exposed thefrailties of our biological environment as never before, in a globallyinterconnected way. By 2020, or perhaps sooner, it will be impossible to reversethe devastating effects of global warming. The past decades of population andeconomic growth have simply been too taxing for our planet’s powers ofresilience. The very word resilience originates in part from ecologicalstudies that measure it by assessing the disturbance that a system (in this casea particular natural environment) can absorb before it undergoes a majortransformation [Hollnagel & Woods, 2006 (in Hollnagel, Woods, & Leveson, 2006)].

Iraq, the ancient Mesopotamia located between the rivers of Euphrates andTigris, in addition to its difficulty in gaining peace, is suffering severesandstorms due to draught and erosion of fertile land (Los AngelesTimes, July 30, 2009), and it may be turning into a wasteland. The citizensof the beautiful lagoon islands of the Maldives are looking for a new home astheirs may be swallowed by rising waters. A fire engulfing more than 100,000square feet in its first week was burning the suburbs of Los Angeles at the endof August 2009. The LA firefighters called the fire “angry.” In Europe, therehas been a sharp rise in fatalities resulting from heat waves, such as the 2003temperatures that killed 15,000 people in France alone. The planet evidentlycannot sustain abusive wars, neglect, and rising temperatures without severeconsequences to its capacity for sustaining life.

Even if the economy is turning around and a new growth period is now emerging,we should not let the crisis of the past years go to waste. It is an opportunityfor transformation; but, more importantly, it is an opportunity also forreflection and learning. Indeed, it would be immoral and wasteful not to takethe opportunity to learn.

RESISTANCE OR ADAPTATION?

When the ecologists talk about “resilience,” they mean the ability of a systemto resist major change (or, to endure perturbances without systemic change).When population ecologists in business schools talk about “structural inertia,”they consider it a hallmark of stability and reliability in a company. Thisforms the absorptive fodder that ideally eliminates the need for restructuring.When Gary Hamel and I wrote about resilience in 2003 in the corporate context,we assumed that change is necessary and that, rather than focus on resistance,it would be best to focus on cost: how to effect change as cheaply, or as freeof trauma, as possible. Figure 1.1 presents this simple framework: anychange can be evaluated relative to its cost.

Cheap change might mean small-scale experimentation that, if it works, iseventually scaled up. It might also mean the compounding of many experiments sothat they add up to something significant. Or it might mean learning from othersbecause doing so is presumably cheaper than going through the experience andinevitable failures yourself. Change that comes cheap might also mean startingearly, so that there is time for learning and correction while all options arestill open—no need to take potentially huge, costly, traumatic, andlife-changing risks.

Most projects can be designed to contain risk while experimenting on the new bytheir nature of being limited in time, scope, and budget. However, the historyof management is a history of delay: incumbent corporations have found itphenomenally difficult to accomplish change absent a forcing function such as afinancial crisis (Hamel & Välikangas, 2003). Even when management is painfullyaware of the need for change, the corporation is still often unable toaccomplish it. General Motors now wishes to bring its newly found sense ofurgency of going through bankruptcy in 40 days to the new GM (WashingtonPost, July 10, 2009). The delay in transforming itself into a presumablyviable company came at a cost of $50 billion in taxpayer money. But many highlysuccessful companies often face the same issue: they cannot reform theiroperations while they are still performing relatively well. The engine cannot bechanged in midflight. The whole flight plan must be canceled before seriouschange becomes possible.

Concrete, short-term urgencies override the long-term, and usually abstract,need for renewal. A lot of management excellence–motivated ink has beenspilled over the balancing of exploitation of the present (earning revenue) withexploration for the future (building future business), and there’s still muchmore to come. However, rather than using this book to try to overturn the oldtruth that “one bird in the hand is better than two in the bush,” I suggest weaccept the difficulty of transition and acknowledge its typically delayed naturedespite calls for creative destruction (how to cannibalize your business now),strategic innovation (compete for the future), or the innovator’s solution(which stems from the innovator’s paradox—doing well for today makes itdifficult to adjust to the future). We should not forget the risks either: astrong-headed pursuit of the unknown is probably good for humankind (we get tolearn) but not so good for the adventurers who eventually pay the price. NiccolòMachiavelli (1469–1527) already noted that “the benefits to the innovatorare uncertain, but the costs to those affected by the changes involved are not.”

In the spirit of the Reaganesque “trust but verify,” let us not abandon ourefforts to reinvent the future (this is the “trust” component), but let us alsosurvive until the future we work for is here (thus we “verify” the claimedprogress). Luft and Korin [2007: 81 (in Fukuyama, 2007)] suggest a great need tomove from “an oil-based economy to a fuel-choice economy,” but they admit thatthe move will take time. The question is: What shall we do in the meanwhile,while this transition slowly rolls along, recovering from many erroneous movesand dead-end paths?

Let us build resilience—to close the gap between the future and ourcapability to meet it.

CHAPTER 2

FALLEN EAGLES: BET ON RESILIENCE, NOT ON STRATEGY

Simply stated: While most authors and executives are busy trying to hit upon astrategy for success and then forging its perpetuation, I propose that a morereasonable preoccupation would be building corporate resilience amid times ofextreme uncertainty, especially when you consider the poor record of strategiesactually delivering their (full) promise (see, for example, “Pop! Went theProfit Bubble,” Fortune, May 4, 2009; also Campbell-Hunt, 2000).Resilience is the capacity that sustains the business while the strategists arehard at work. It is also the capacity to survive rare events—unexpectedchanges that may be minor (like Apple’s iPod) or major (the 2008 financialcrisis). When something unexpected happens, or our assumptions aboutlikelihoods, causal sequences, and human behavior turn out wrong, it isresilience we fall back on.

Most of strategy literature focuses on how to arrive at a winning strategy. Thismay require superior customer insight, leadership agility, innovativeness, orgood execution. Yet the record of success through strategy excellence leavesenough failures to suggest that wise and responsible corporate leadership shouldnot focus on strategy formulation and implementation alone (for example,Witteloostuijn, 1998). In other words, don’t bet the company on its currentstrategy. Rather, consider two other factors as well.

First, companies need to look at how they manage when strategy is not yet or nolonger performing optimally. Resilience provides the capacity to sustainstrategy change. It is the strength an organization draws on in the in-betweenstate, when the old strategy is not really working and the new one is stillbeing developed. What we need to realize is that this in-between-strategiesstate is now the dominant mode in most companies! Nokia is seeking to reinventitself as a software and services company (it is no longer device focused,though it launched its first notebook, a new device for the Internet). Microsoftis trying to become an Internet company. General Electric is seeking rapidly tolessen its dependence on its financial business and become an imaginative”green” company. British Petroleum was, until recently, poised to become acompany focused on alternative technologies (“beyond petroleum”). The Finnishpaper company UPM is becoming an energy company. Amazon.com has longbeen moving toward becoming an Internet marketplace in which many other productlines in addition to books are sold. And Starbucks is seeking to return to itsroots as a great coffee company. The prevalence of such frequent transitorystates emphasizes the importance of resilience—the company’s carryingforce throughout change.

Second, a lot of strategy literature suggests that great companies fail notbecause of something they don’t do but because of something they do toomuch: they cannot stop.

Polaroid did not manage to transition from instant photography and film intodigital cameras, despite its having invested in relevant R&D and making otherpreparatory moves in digital technology. The company simply could not give upits heritage in instant film. (Even now, there is an admirable movement torejuvenate the old instant photography technology by Polaroid employees andhobbyists together, as reported by the Financial Times, August 15, 2009.The “Impossible Project” has drawn modest investment, but its real mission is”to release new stocks of film before the last supplies expire” to preventcamera owners’ trashing their cameras before they will be able to get new film.)

Many companies, just like Polaroid, keep doing what they did well in the past,long after it is of any commercial value or market relevance—this is theso-called Icarus Paradox identified by Danny Miller (1990). Resilience—inthis sense, tenacity—may help a company to survive far beyond when itsstrategy has lost all vitality. It would take a long time, for example, forMicrosoft—a very asset rich company—to burn down all of itsaccumulated billion-dollar wealth during times of its great success as a PCsoftware powerhouse, even if the company stopped producing new success stories.Companies like Microsoft may be “permanently failing” for a long time beforethey go bankrupt (Meyer & Zucker, 1989). The hard question is—as JimCollins poses in his book How the Mighty Fall: how would we know (orrather, be convinced) we are failing when our performance is still technicallyacceptable?

THE DEMISE OF STRATEGY AND ITS DELAYED SUCCESS

In addition to the difficulty of being flexible in strategy implementation onceit is formulated or giving up a strategy when it’s no longer working, there aretwo conceptual strikes that can be made against strategy.

First, we don’t have a very accurate model of how the world (generally, on anormal day) works. The recent fall of financial economics is a perfectillustration of this point. The reality did not follow theoretical predictions,nor risk assessments. Triana (2008: 20), in a spirited critique, has stated thatBear Stearns’ Value-at-Risk, a common measure in the financial industry of acompany’s possible loss at the end of the trading day, was $60 million just afew days prior to failure (with declared assets worth $8 billion). Further,Gillian Tett, in the Financial Times (July 24, 2009: 18), has suggestedthat not only are there uncertain expectations as to whether inflation ordeflation is to result from the “quantitative easing” practices by the FederalReserve in the United States in 2009, but there is also confusion as to the veryintellectual framework that would help answer the question. “The old economicmodels … no longer look reliable.”

Furthermore, Nassim Nicholas Taleb (2007: xx) persuades us forcefully that we donot even know that we do not know (or conversely, what we know does not reallyhelp us much): “The inability to predict outliers implies the inability topredict the course of history…. What is surprising is not the magnitude of ourforecast errors, but our absence of awareness of it” (italics added). Inpart, the knowledge we have (provided that others know we have it) prevents suchoutlier events from happening, at least if they are human intended.

There is fundamental uncertainty about future prospects. The future isunknowable. On which, then, do we build our strategies?

Second, there are a number of extraordinary events that disturb the assumednormalcy. Taleb (2007), again, writes about rare, potentially catastrophicevents that he calls “black swans,” whose occurrences cannot be predicted intime. Bill McKelvey, a professor at UCLA’s Anderson School of Management, hasstrongly criticized the use of normal distribution as a basis for organizationaltheorizing. He has suggested that the power law distribution—an expressionof probabilities frequent in networks—is a much more accurate basis forstudy when there is connectivity. Power law distributions have long tails,suggesting that they do not behave the way that events do according to normaldistribution. It is not only that people are “boundedly rational” (Simon, 1979)or that biases and decision-making heuristics distort the choice toward less”rational” or theoretically optimal outcomes (Kahneman & Tversky, 1979). It isalso that risks, in rare instances, may become highly correlated even if theyhave shown independence in the past. It is a sort of domino effect, a collapseof past tendencies into one big meltdown. The world has become so interconnectedthat everything now depends on everything else: banks don’t lend, organizationsrun out of money, people stop buying, there are no jobs. There is no market tobuy and sell.

A potential third strike against strategy is the temptation for ruling byhindsight. Professor Karl Weick at the University of Michigan is attributed asaying akin to “Strategy is sense making in retrospect.” The realized outcomelooks inevitable only now that we know which dots to connect and which toignore. Naturally, looking forward we see potential for a multitude ofpossibilities. Honda’s entry to the U.S. car market is perhaps the most oftentold story of retrospective strategizing (see Pascale, 1984, 1996). The Hondarepresentatives discovered the demand for small motorcycles by accident. (“Anold lady asked where to buy a motorbike like the one the Honda representativewas driving.”) Reluctant to dilute their brand image as a maker of great carswith small motorcycles, and acting without the knowledge of corporatemanagement, the Honda representatives nevertheless decided that sellingmotorcycles was their only option, having failed to achieve straightforward U.S.market entry earlier with automobiles. In retrospect, Honda appeared to haveexecuted a brilliant strategy (see the BCG report Strategy Alternatives forthe British Motorcycle Industry, 1973). Similarly, Best Buy, a highlysuccessful U.S. consumer electronics retailer, saw the beginning of its big-boxretailing in electronics in a Midwestern tornado that caused water damage to theinventory. Discounted electronics were a hit, and thereby a business model wasborn. Serendipity, rather than strategy, was the true force at work.

Strategy has been the bulwark against uncertainty, on one hand, and the magicwand for success on the other. [Think of “blue ocean strategies” by Kim andMauborgne (2005), for example, where the focus is on the discovery of theheretofore “uncompeted” business arenas.] Perhaps only the wordinnovation is more reliable than strategy for lifting spiritstoward victory. Yet strategy has diminished in stature due to its proveninability to cope with fundamental shifts in the business environment. “Novisibility” was the expression used by the CEO John Chambers of Cisco Systems inthe dot-com bust of the 2000. “Impossible to call” say many more executives in2009, though the Nokia CEO Olli-Pekka Kallasvuo claimed “the freefall” had endedin late spring 2009. Indeed, even in the best times, the role of strategy isunclear: “The market was growing so fast there was no need for strategy” was oneexecutive’s explanation of his company’s process in the late 1990s. Just crankthose phones out, efficiently and reliably. No wonder Nokia’s strongest suit islogistics (Arlbjorn et al., 2008).

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(Continues…)Excerpted from THE RESILIENT ORGANIZATION by LIISA V, *NULL* #196;LIKANGAS. Copyright © 2010 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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