Welcome to the Edge

In a turbulent global environment, how can we master the unpredictable? Let us boldly go to "the edge of chaos," where structure meets adaptability.

by Louisa Wah

You are a leader with a vision. By your grand design, employees are well-suited to the company's culture and working hard to achieve its objectives. You seem to have predicted the right path to the future for the business. Then, all of a sudden, a competitor comes along and changes the market landscape like a lightning bolt. Now you not only have to deal with the current disaster, but also prepare for another time bomb lurking around the corner.

What's wrong with your vision and your planning? Didn't you predict the future far enough in advance? Didn't you think strategically enough to avoid vulnerable situations like these? The crux of the problem is that the future is inherently unpredictable. By trying to predict and even plan for it with a single, organizationwide "shared vision," you are doing something that's unrealistic and impossible.

The answer to this dilemma may lie in the sciences of chaos and complexity. By looking at your business as a complex, nonlinear system, you will be able to equip it to meet any future turmoil with the resilience needed to thrive.

Inspiration From Chaos

The future is traditionally thought of as an extension of the past. If one knows the starting point, one can predict the future path of an event by following a straight line. That's how most of today's business projection tools work. But the discovery of nonlinear, dynamic systems by Edward Lorenz of MIT in the 1960s changed that worldview in fundamental ways.

Although this scientific theory, known as "chaos theory," was discovered decades ago, only in recent years has it emerged as a model for explaining the chaotic business environment. The chaos model introduces the idea that chance, changing conditions and creativity can enter a complex system at any point and alter its course. Therefore, in addition to anticipating and responding to change, businesses have another, more powerful option: They can "influence change as it is emerging," says T. Irene Sanders, author of Strategic Thinking and the New Science (Free Press, 1998) and principal of Sanders & Co., Evergreen, Colo.

While chaos theory helps businesses understand how markets change, they must look to "complexity theory" to manage effectively in a tumultuous environment. "Complexity theory says if a company is too tightly structured, it can't move; and if it's too chaotic, it can't move," says Kathleen Eisenhardt, co-author with Shona Brown of Competing on the Edge: Strategy as Structured Chaos (Harvard Business School Press, 1998). "There is a point called the 'edge of chaos' where companies can move." At that point, a company has enough structure to hold people and processes together, yet enough flexibility to allow innovation and adaptation.

Eisenhardt, a professor of strategy and organization at Stanford University, offers several examples of the concept of being "at the edge." One is jazz music. While jazz musicians follow a few basic rules, their improvisation relies largely on "a lot of communications but not much of anything else." Another example is the behavior of teenagers. "You give them some rules so that they don't make big mistakes. But you have to give them freedom so they can grow," says Eisenhardt.

Being on the edge thus means striking a balance between order and chaos, between anarchy and rigidity, and between stability and instability. Like a skater trying to regain balance and momentum by temporarily losing equilibrium, Eisenhardt believes that organizations must give up some stability and control to achieve new heights of efficiency and innovation. This state is what Ralph Stacey calls "bounded instability" in his book, Managing the Unknowable (Jossey-Bass, 1992) and what Daryl Conner, author of Leading at the Edge of Chaos (Wiley, 1998), calls "structured flexibility."

Conner, who is president and CEO of ODR, a research-based consulting firm in Atlanta, says the U.S. Army best exemplifies this model of nimbleness. Military colleges teach principles instead of rules, he says. But in times of combat, what determines success is an application of those principles that recognizes what's occurring in a chaotic environment. "It's a balance between the adherence to policy to keep it consistent and modifying it to keep it from becoming overly rigid," says Conner.

A Nimble Organization

How do organizations achieve the kind of flexibility that exists in the military? Experts say that adaptation is the heart of competing on the edge. Companies must become "complex adaptive systems" (CASs) that resemble the nonlinear feedback systems one can find so abundantly in nature.

An important characteristic of CASs is that they don't have any central control, says Mike Simmons, managing director of the Santa Fe Center for Emergent Strategies, a consulting organization that applies complexity theory to management strategies. Instead, CASs are composed of autonomous agents whose interactions with each other produce the emergent structures that form the unique properties of the system.

A classic example of a CAS is the flocking behavior of geese. They appear to follow a few simple rules, such as "don't bump into each other," "match up with the speed of other geese flying nearby," "replace the lead goose when it gets tired" and "always stick with the group." Notice the kind of constant feedback and adaptation the group relies on to achieve its goal of remaining resilient in the face of changing circumstances.

Many of the world's naturally occurring CASs, such as the immune system, ecological systems and human cultures, are robust and long-lasting but lack central control, says Simmons. On the other hand, "it's very hard to find a company with a very long lifetime," he says. "Perhaps natural CASs are trying to tell us something about how to build robust human systems."

The reason so many organizations die young, according to Ralph Stacey, a lecturer in strategic management at the University of Hertfordshire in Hertford, UK, is that managers build only on the organization's existing strengths and seek stability. "When some more imaginative competitors come along and change the rules of the game, such overadapted companies, like overspecialized animals faced with a major climate change, cannot respond fast enough," he wrote in Managing the Unknowable. To avoid such fatal failures, companies must constantly pay attention to new strategic directions that emerge spontaneously from the organization's inherent challenges and contradictions.

Rather than stifling chaos, managers should allow it to flourish. They also must ensure that the work environment encourages interaction and creativity. ODR's Conner says that nimble leaders don't provide "answers." Instead, they "build a flexible process that helps employees come up with an answer."

Building a nimble organization requires more than leadership, however. The entire organization must be involved, and a dynamic, organic structure is needed to make it work. A CAS has multiple participants that are networked together in a "webby, messy kind of way," says Myron Kellner-Rogers, a principal of Kellner-Rogers & Wheatley Inc., an organizational change consulting firm, and a founder of the Berkana Institute, a scientific research foundation in Ithaca, N.Y.

Unlike the traditional management system, which treats the organization as a machine reducible to its smallest functional parts, a CAS is a "living system" and operates as a single unity. Its capacity resides not in the individual parts but in the function of the whole, says Kellner-Rogers, who coauthored A Simpler Way (Berrett-Koehler, 1996) with Margaret Wheatley.

He cites ant colonies as an example. Over time, the ant colony becomes more intelligent and more adaptive to the environment. And yet, all of the ants in a colony die each year. It's the collective intelligence and action that make the entire system adapt and improve upon itself.

How can companies build that kind of collective intelligence? Kellner-Rogers' answer is to create a strong sense of shared meaning so that people have the freedom to make decisions based on local situations much faster.

"In the old view of organizations, I didn't have to think about the environment because somebody has to direct me," he says. "But in a complex turbulent environment, the mechanistic, authoritarian and hierarchical decision-making process is too slow and too cumbersome to react to the situation. You need to rely on people in the organization everywhere, to bring their intelligence and capacity to their work and to make decisions quickly."

To create the conditions in which people feel trusted and encouraged to make decisions, leaders must realize that the intelligence any organization needs is contained everywhere within it. "It has no hierarchy. The information that a secretary has and a CEO has--no one is better than the other. They are just pieces that need to get together," says Kellner-Rogers.

He cites a telling example: One of the hotels in the vicinity of Disney World underperformed other hotels in the area, even though its quality was comparable. Management reassessed the advertising and marketing programs, to no avail. One day, the person in charge of telephone operations told the hotel manager in the elevator, "when people call up to make reservations, we always mention the site is on a golf course. But most of the time, women are making reservations, and they don't want their husbands to play golf. They want the family to go to Disney World!" After capturing that important piece of information, the hotel dropped the reference to the golf course and business improved.

Absorbing Future Shock

Besides a high degree of interactivity and intelligence-sharing, an organization that wants to manage the unknown future must have the capacity to absorb shocks in times of turmoil, which can strike at any time.

Conner views an organization as a sponge. When it comes to absorbing change, there is only so much it can take it. "A nimble organization would ask, 'Do we have the capacity to absorb change?'" If not, he says, a company can do two things: Squeeze something out of the sponge or hire more resilient people to increase the capacity for change.

Human capital plays an important role in the ability to remain flexible in times of change. The U.S. labor shortage could limit companies' resilience, for example, but those that build a flexible workforce will have a choice of people who want to work for them even when the labor market is tight, says Beverly Goldberg, vice president of the Twentieth Century Fund, a New York research foundation, and author of Corporation on a Tightrope (Oxford, 1996). She suggests buiding trust and loyalty even among temporary, contract and part-time workers by delegating responsibility and decision-making power to them. "Senior management has to build a culture of devolving authority to the lower levels," she says. "That's what makes a flexible system possible, and that's absolutely a key for companies to survive in the future."

Another way to reduce "future shock" is to probe the future by constantly exploring a large number of possibilities. In some companies, employees form spontaneous teams to develop their own innovative ways to solve problems. When one path emerges as the right course, all resources amass around that effort quickly and a solution is found. The results are faster innovations and fewer chances of failure.

One might argue that this process is not cost-efficient, but Simmons says that adaptive systems can't take the idea of "efficiency" too far. Cutting some of the messiness and costs from which new ideas emerge will stifle future success. "You have to be comfortable with a little messiness, because adaptive processes are not efficient, but they are innovative," he says.

Taking the Future Further

Many changes in the world of business may seem surprising if we are completely blind to the future. But experts say we can see at least part of it from where we stand. Using chaos theory to understand the interconnectedness of the world--think of the "butterfly effect"--will help us recognize the causes of certain "chance happenings" and be better prepared to cope with them.

Take Asia's financial crisis. In the past, companies would have said it was just another random event. "The truth is, many of these seemingly random events can affect their business," says Sanders, who also is director of the Business Network Colorado Center for Chaos & Complexity at the University of Colorado, Boulder.

Given the interconnectedness of the global economy, Sanders says, it's more important than ever that companies be aware of emerging issues and quickly determine how to respond. But to do so, they need an organic and evolving approach to planning. The old planning model focused on "forecasting" one or a few possible paths of events, while a revolutionary paradigm called "foresighting" allows one to master the situation no matter how the future turns out. According to Sanders, understanding the present is the primary step in gaining insight into the future.

The practical way to achieve that understanding is to engage in what Sanders calls "visual thinking," a process that helps paint the big-picture context in which decisions are made. It involves mapping on paper all the core issues and "perking" data that surround your entire environment. "Visual thinking connects the intuition about a situation with the data you already have," she says. "If you are drawing the picture of what you've just heard, you can see the interconnection, relationships and patterns of interaction."

When all employees participate in visual thinking, Sanders says, the individual perspectives will create a realistic picture of the environment that includes a full range of perking data. These data reflect the emerging issues that may become the challenges and opportunities you will face in the future. Recognizing them, responding to them and influencing them before they erupt as unexpected events will help you master the future.

Looking Far Ahead?

Amid all the chaos, companies shouldn't hope to devise the "ultimate" strategy for the future. Eisenhardt of Stanford University says companies need to have one at any point of time, but the key is: "Any strategy is temporary."

The best way to plan for the constantly shifting future, she says, is to have several strategic plans that look no more than a year ahead, because things change too fast for five- to 10-year plans. Shorter-term plans can be adapted much faster to the changes occurring in today's "Internet time."

But to avoid being a slave to the environment, Eisenhardt suggests that companies adopt another tactic: time pacing. Time pacing is like having an internal clock that regulates the rhythm of change, independently of what is happening in the environment. "Time pacing is really important; it's the secret ingredient for top companies," she says.

For example, Starbucks aims to open 300 stores each year to hit 2,000 outlets by 2000, 3M aims to achieve 30 percent of its sales from products that are less than four years old, and Cisco Systems works to the rhythm of weekly sales goals. By managing the internal rhythm of change and striving for innovation and growth, these companies are able to lead their respective markets. Of course, time pacing doesn't always mean you should go faster. Eisenhardt says companies should determine their own optimal rhythms and decide to slow down or change pace as needed.

Science Can't Explain Everything

However useful chaos and complexity theories are, the promise they hold out to businesses is not yet complete. The reason is, the business environment has more variables than these theories can fully explain. Simmons of Santa Fe Center for Emergent Strategies says the scientists he knows who have studied the stock market for evidence of chaos don't find it a productive way to go. That's because scientific research on chaotic systems is best able to take into account only a limited number of variables.

"It's very, very difficult to analyze chaotic systems with more than, say, a dozen variables," he says. And there are simply too many variables--and fussy ones--in the business world.