CHAPTER 3

Nothing is Permanent Except Change

Have no fear of perfection; you’ll never reach it.

—Salvador Dali

As you saw in Chapter 2, many organizations are not agile enough. They are struggling to adapt to changing circumstances, which often threaten their existence. In Chapter 3, you will discover the causes of these changing conditions and why it is often difficult to deal with them.

3.1 Change is a Constant

“Nothing is permanent except change.” These wise words were expressed by the Greek philosopher Heraclitus around 500 BC. Now, 2,500 years later, it appears that change is indeed still something we have to deal with constantly, and within organizations. That is confirmed by various, annual, large-scale studies conducted among CEOs worldwide. They are asked to identify the most important issues on their agendas for the foreseeable future.¹ Although there are obvious differences in study approaches, there remains, in recent years, a clear common thread running through the responses.

CEOs see that

• market conditions are increasingly changing;
• developments in information technology are making the playing field faster and more complex;
• speed of change in digital environments is much higher than in traditional offline environments;
• there is always more competition;
• it is becoming increasingly difficult to keep a sustainable competitive advantage over the longer term;
• unexpected new entrants, with disruptive business models, change the market fundamentally and permanently;
• continuous innovation is needed to remain customer-relevant in the future; and
• data are a strategic weapon in the competitive struggle.

In short, plenty of challenges. The CEOs are—rightly—concerned about how their organization can survive in the future. In addition, they also indicate that the time horizon of their strategy planning gets ever closer, because changes are occurring ever more rapidly. They are very ambivalent about these changes, because the momentum of change is growing and many of the issues are interrelated. This makes predicting future scenarios increasingly difficult. It’s not for nothing that Mark Twain once said: “It is difficult to make predictions, especially about the future.”

VUCA

This problem is also referred to by the term VUCA, an acronym derived from the US Army and used to assess combat situations in terms of their volatility, uncertainty, complexity, and ambiguity.² This concept has been adopted within public and private organizations to assess developments in their current and future contexts. But how do you know if you’re dealing with a high(er) degree of VUCA? The four factors can be described as follows (see also Figure 3.1):

Figure 3.1 The VUCA factors limit the possibilities of strategy planning

• Volatility—The established order is changed or is in a mess. The unexpected happens, and the opposite happens to that which you would have expected. New concepts appear and you are unsure if they are correct and relevant, and you’re wondering if and how to apply them. Old ideas seem not to work anymore.
• Uncertainty—You’re not sure what is happening or will happen and it affects your self-confidence. You find it increasingly difficult to predict, forecast, and anticipate well. The result is that it becomes very difficult to prepare adequately and appropriately and keep things under control.
• Complexity—Events appear to have many possible causes. Cause–effect relationships are unclear because the changes seem too complicated to discern, let alone define. This disorder is complicated by the growing number of interdependent factors that are the causative agents.
• Ambiguity—For a given situation or change, there are several possibilities of meaning. You’re torn between all the alternative interpretations of a situation. It is no longer easy to say if something is good or bad, right or wrong.³

The extent to which VUCA factors apply determines the limits and the scope of strategy planning. And these limits appear nowadays to be even more restrictive. The Telegraph Media Group (TMG), for example, experienced this after taking over Hyves at the end of 2010. At the time of the takeover, Hyves was at its peak, with 10 million members, but many had already noticed that the social networking site was losing member activity to the new kid on the block, Facebook. Within months, a quarter of Hyves’ users closed their accounts. Soon this change achieved critical mass and, at the end of 2012, Hyves was literally decimated: only 10 percent of the original members were still active. TMG decided to turn Hyves into a gaming site for kids. This has not been a success and, recently, TMG wrote off €43 million.

Change is happening so fast that one might speak not of an era of change, but a change of era. To illustrate this, Figure 3.2 shows how in recent years it took start-ups ever less time to reach the “unicorn” status, a market capitalization of one billion dollars. The exponential decline shows a “double down” speed comparable with that in Moore’s Law, which, based on his thirty years of research, Kurzweil adapted into the Law of Accelerating Returns.⁴ A comparable effect can be seen in Figure 3.3, which shows how innovations need ever less time to reach 50 million users.⁵ So, welcome to the agile age!

Figure 3.2 The time needed by start-ups to reach the “unicorn” status in recent years

Figure 3.3 The time needed by innovations to reach 50 million users

And, if predicting changing conditions is apparently so difficult, logic implies that organizations must then be very good at “seeing things early” and adapting to changing circumstances as soon as they perceive them. Therefore, it is useful to understand the genesis of change, so you can instantly develop effective solutions. This starts with understanding the factors that are the driving force behind the changes. Consequently, in the next section, we discuss the causes of change.

3.2 The Origins of Change

Changes can be either internal or external. This usually means that internal changes are due to, or in anticipation of, external changes. Therefore, we will look at them separately.

External Changes

Do you still have a video store near where you live? Or a music store around the corner? A printing shop, perhaps? A baker, greengrocer, butcher? Probably not. And when did you last see a bookstore outside of a city center? The disappearance of these retailers has everything to do with what these traders experienced as external changes.

External changes are caused by underlying factors known as “drivers.” Within these drivers, we can distinguish eight different categories, set out in the STEEPLED analysis model in Figure 3.4:

Figure 3.4 Drivers of change in the market

1. Sociocultural: Social developments, for example manners, public opinion, lifestyle, culture, art, and religion.
2. Technology: Innovations in products, processes, and systems and their adoption, including, for example, infrastructure and communications.
3. Economy: Changes in the economy and purchasing power through factors such as imports and exports, inflation and price levels, disposable income, income, and consumer confidence.
4. Environment: Changes in factors like availability of natural resources, energy, health, environment, nature conservation, and ecology.
5. Politics: Policy and influence of both the government and politics on society, such as public order, business environment, and through interventions in the economy.
6. Legislation: Legal factors such as laws and regulations, as well as the affairs of law enforcement through prosecution, the judiciary, and other qualified authorities.
7. Ethical: Ethical and social values of the population (this category is closely linked to category 1, the sociocultural).
8. Demographic: Composition and situation of the population; aspects such as size, location, age distribution, sex, race, education level, occupation, and family composition.

When you look through the lens of the STEEPLED model at the examples of Kodak, Nokia, and Iridium (from section 2.2), you immediately see the changes that so challenged these companies were caused by developments in the second driver, Technology. This is probably also one of the main drivers of the past 25 years—alongside of course the driver Economy, responsible for the enormous impact many markets experienced during the financial crisis of 2008. The driver Environment led to changes in the demands of customers and governments in the area of sustainability; much change has been driven by Legislation in, for example, the operating practices of banks and insurance companies, and many car manufacturers profited from tax incentives on electric vehicles.

The music industry, too, has endured unprecedented change. The digital revolution was accompanied by a massive reduction in turnover, from $38 billion in 1999 to $16.5 billion in 2012, a staggering 50 percent drop. Not only did turnover reduce, it also started to come from completely different sources. Previously, artists produced a new album and went on tour to promote it. Nowadays, concerts account for more than half of the turnover and albums are released primarily as a marketing tool to sell tickets for concerts. In addition, artists generate income from merchandising, YouTube ads, licenses for television and film productions, iTunes downloads, and royalties for streaming through sites such as Spotify and Internet radio stations.⁶

Something similar happened to the newspaper industry, where revenues declined over the last decade from $44.9 billion to $18.9 billion, due to declining advertising revenues and subscriptions.⁷ Publishers are still searching for new online business models, because the print business is no longer tenable. Often, these initiatives have come from outside their industry, such as in the case of Zite, Flipboard, and Feedly.

In general. you can say that the increased importance of agility is, in particular, due to⁸

• technological developments and digitalization making product lifecycles shorter, intellectual property becoming increasingly difficult to defend, and the commoditizing of increasing numbers of products and services;
• global markets shifting more and more economic power to countries like China, India, and other emerging economies;
• hugely increased market transparency due to the explosion of online channels with a consequent increase in the power of the customer; and
• online channels making possible direct interaction and collaboration with customers, suppliers, partners, and colleagues from other departments, accelerating innovation.

Internal Changes

Internal changes are rarely autonomous. Generally, they are a direct or indirect result of external changes that are visible in the market. Internal changes can occur in areas such as structure, processes, systems, staffing, skills, leadership, and culture (see Figure 3.5). These changes are the tangible results of implementing organizational policies. The concrete manifestations of internal changes appear as restructuring, cuts, new IT systems, training, and cultural programs.

Figure 3.5 The 7S model shows those internal factors that can change⁹

The “strategy” factor plays a special role within internal changes: in strategy, the organization determines what it wants to mean in its market and to whom, and how it goes about doing so. The most tangible internal changes become visible if the organization decides to start some of the initiatives found in the famous Ansoff Matrix. This concerns, in particular, the adaptation of existing products or services, offering existing products or services in a new market, or offering new products or services in existing or new markets for the company. These policy decisions are a response to external changes, but can also occur entirely independently.

This approach is not limited explicitly to external customers. Also, departments that service internal clients might decide to modify their existing products or services or to offer new products and services. This is because an internal customer will make different demands, on the basis of changes in the 7S model. Or because the changing requirements of external clients filter through to internal departments. This happens when customer-facing departments (such as marketing, sales, and service) translate changing customer needs into their own requirements, which they communicate back along the line to the originating department. For this purpose, we define the internal customer as either “the next process” in the value chain or the specific department receiving the goods or services from the originating department.

Consequences of Changes

The effect of both internal and external changes is that the organization has to adapt to new requirements, which affect both the internal and external activities of the organization, if they are not doing so already. To deal with this, the organization must be adaptive, as can be seen in the lower part of Figure 3.6. In the upper part, we see that the underlying causes of new requirements can be divided into five categories, as discussed above. Within the first two categories, the driver is changes in the business environment:

Figure 3.6 Five types of change that ensure the organization must adapt to new internal and/or external requirements

• changing external conditions, as discussed above with reference to the STEEPLED analysis model;
• changing internal conditions, as discussed via the 7S analysis model.

The remaining three categories are of a different sort, namely those triggered by the existing strategic policy. Here, it’s about improvement and innovation, whereby it also must be learned how the market will react to a modified or new proposition:

• adapting existing products or services in an existing market;
• introducing new products or services in the current or a new market (as mentioned in the Ansoff Matrix segments Product Development and Diversification);
• introducing existing products or services into a new market (as mentioned in the Ansoff Matrix segment Market Development).

The better you periodically monitor the root causes relevant to change, the faster and more effectively you can anticipate those changes. That plays an important role in agility. But, you will now see why this is so difficult for many organizations.

3.3 Barriers to Adaptivity

Which do you prefer: a long or a short queue? Most likely short. But do you always have the feeling that, somehow, you inevitably choose the wrong line at the supermarket? Or at the toll booths on a highway? In McDonald’s or Ikea? Imagine you’re in a traffic jam on a road with multiple lanes. What do you do? Adjust to the situation by switching from lane to lane, or just sit there? Whatever you choose, the chances are that unintentionally you are confirming Murphy’s Law: the person who was next to or behind you is already through. When you’re in a queue or traffic jam, this can be painfully obvious.

But if, for example, you want to avoid a traffic jam, by taking the alternative route recommended by your navigation system, then this is not so obvious. Often, when you have made a decision for one route, you have to deal with the nagging feeling that the other route would have been better. You’ll never really know. In short, you want your performance (the time you’re waiting in line or in traffic) to improve by changing your behavior, but don’t really know how to change. That is the way it also works in organizations.

The behavior of organizations such as Kodak, Nokia, and Iridium is, of course, not unique. Most organizations have some degree of difficulty in adapting to changing circumstances. The entrepreneurial network, which made them successful in their initial stages, has transformed into a hierarchical organizational structure that creaks and cracks when faced with the need for rapid change. There are various reasons for this and we’ll take a short look at the three most important.

Resistance

Children around seven years old can watch the same movie endlessly (some parents probably know the script of Frozen by heart, involuntarily). Psychological research shows that this is because they like predictability and a feeling of being in control. Their mental faculties are usually limited, as is their worldview. Watching or listening, again and again, to something they already know, gives them confirmation of what they already know and a pleasant sense of familiarity. Something similar happens at the table. Most children like to eat and drink what they already know, and don’t like tasting new foods or trying new flavors, because they assume that they will not like them.

Sometimes, organizations seem to behave just like young children. They develop repetitive patterns that are hard to break. Changes constitute a potential threat to these routines and are, therefore, often seen in a negative light. This can mean that employees choose, consciously or unconsciously, to ignore changes, or even actively oppose them—you can see it as a particular manifestation of the fight-or-flight response.¹⁰ Research also shows that this resistance is often tremendously energy-consuming, which, at best, simply slows down the process and delays the consequences. It is wiser to use the tactics of judo, staying perfectly balanced, waiting to use the energy of the “opponent”. As you will see, in Section 7.4, culture and leadership play an important role in this.

Cooperation

Besides this psychological aspect, there is also a “harder” factor at play and it is an important one. Many companies are organized classically, along the lines of structures, systems, and processes. The traditional silo architecture of line organizations, based on products, services, or channels, creates obstacles to internal cooperation. But internal cooperation is crucial for the organization to monitor and identify changes holistically, and, on this basis, to initiate the rapid and integrated activities needed to adapt.¹¹ Lack of internal cooperation leads to a rigid way of working and insufficient resilience to respond quickly and effectively to changes—let alone anticipate them.

Fear of Failure

But yet something else is working here. More and more companies have external shareholders or investors. Especially in the case of a publicly traded company, where the shareholders demand the maximum predictability of results. This forces the leadership to focus increasingly on the short-term, with the consequence that they fail to monitor longer term change. Also, managers and employees often feel that they dare not make mistakes, because they will be punished. Experimentation is thereby seen as too risky, which leads to a culture of choosing the safe course of action, of “looking after the shop.” Failure is not an option; people have a compulsion to choose what they know over what they do not: an “idée fixe.” This creates a kind of false security. And this isn’t just relevant for listed companies, but applies just as well to start-ups, family businesses, and nonprofit organizations.

Recognizable? Fear of failure (Atychiphobia) is so important that we are going to expand on this phenomenon, with the aim of inspiring you.

By reading this chapter, you’ll have discovered the following:

•  Levels of volatility, uncertainty, complexity, and ambiguity in the market are getting higher. Competitor and customer behaviors are changing faster and deeper. This shortens the time-period that plans can cover.

•  Changes take place both internally and externally. This can be monitored with the aid of the STEEPLED and 7S models.

•  Although many organizations experience changes in their circumstances, they fail to fully adapt because they are not adaptable enough. The main reasons are resistance to change, lack of internal collaboration, and fear of failure.

References

1.  See mckinsey.com, bcg.com, kpmg.com, pwc.com, ibm.com and accenture.com for the various CEO studies.

2.  Stiehm, J. H., and N. W. Townsend. (2002). The J.E.S. Army War College. Philadelphia: Temple University Press.

3.  Horney, N., and T. O’Shea. (2015). Focused, Fast and Flexible. Oceanside: Indie Books International.

4.  Ismail, S., S. M. Malone, and Y. van Geest. (2014). Exponential Organizations. New York: Diversion Publishing.

5.  Citi GPS, Technology at Work. (2015); Dobs, No Ordinary Disruption: The Four Global Forces Breaking All the Trends (2016)

6.  Pfanner, E. (2013). Music Industry Sales Rise, and Digital Revenue Gets the Credit. New York Times, November 22, 2013.

7.  Pew Research Center. (2013). Newspapers: Stabilizing, but Still Threatened—The State of the News Media. Washington, D.C: Pew Research Center.

8.  Setili, A. (2014). The Agility Advantage. John Wiley and Sons.

9.  Peters, T., and R. H. Waterman. (2005). In Search of Excellence. London: Profile Books Ltd.

10.  Cannon, W. B. (1932). Wisdom of the Body. New York: WW Norton and Company.

11.  Hoogveld, M. (2013). The Excellent Customer Journey Experience. Amsterdam: Adfogroep.