Five Fundamental Change Drivers Over the Next 15 Years

Fifteen years can result in major global change. At the start of the 1990s, China was largely a planned economy, and the Soviet Union still existed. Few people had heard of the Internet and e-mail seemed closer to science fiction than reality. The next 15 years will bring further massive changes to the shape of the world economy, to the landscape of major industries and to the workings of the company. Key trends over the next 15 years can be summed up as follows:

Globalization . It’s too early to talk of Asia ’s century, but there will be a redistribution of economic power. Emerging markets, and China and India in particular, will take a greater slice of the world economy. Non-OECD markets will account for a higher share of revenue growth between now and 2020 than OECD economies. Labor-intensive production processes will continue to shift to lower-cost economies, which will still enjoy a massive wage advantage over developed markets. The pace of globalization will be arguably the critical determinant of the rate of world economic growth.

Demographics . Population shifts will have a significant impact on economies, companies and customers. The favorable demographic profile of the US will help to spur growth; aging populations in Europe will inhibit it. Industries will target more products and services at aging populations, from investment advice to low-cost, functional cars. Workforces in more mature markets will become older and more female.

Atomization . Globalization and networking technologies will enable firms to use the world as their supply base for talent and materials. Processes, firms, customers and supply chains will fragment as companies expand overseas, as work flows to where it is best done and as information digitizes. As a result, effective collaboration will become more important. The boundaries between different functions, organizations and even industries will blur. Data formats and technologies will standardize.

Personalization . Price and quality will matter as much as ever, but customers in developed and developing markets will place more emphasis on personalization. Products and services will be customizable, leading firms to design products in a modular fashion and, in the case of manufacturers, assemble them in response to specific customer orders. Customers and suppliers will be treated in different ways, depending on their personal preferences and their importance to the business.

Knowledge management . Running an efficient organization is no easy task but it is unlikely on its own to offer lasting competitive advantage. Products are too easily commoditized; automation of simple processes is increasingly widespread. Instead, the focus of management attention will be on the areas of the business, from innovation to customer service, where personal chemistry or creative insight matter more than rules and processes. Improving the productivity of knowledge workers through technology, training and organizational change will be the major boardroom challenge of the next 15 years.

Managing Organizational Change By Putting People First

Most companies say their most important assets are their people, but few behave as if this were true. Many, if not most, important organizational endeavors today devote the majority of their budgets to technology and processes, not staff development. There is a general bias that focusing on tangible assets will impact the bottom line more than the intangible assets, which primarily involve people. Ask organizational leadership what they are spending on their human assets and what return are they getting and you will likely receive a blank look in response. In the evolving world where knowledgable human assets will be increasingly at the center of any organization's competitive abilities, failing to recognize the need to place human considerations first in all strategic, operational and cultural thinking will result in dire consequences.

Evidence suggests that staff management issues have a direct effect on the bottom line. According to a Watson Wyatt study, three-year total returns to shareholders are three times higher at companies where employees understand corporate objectives and the ways in which their jobs contribute to achieving them. In a study of change management strategies by McKinsey, the 11 most successful companies gained an average of 143% of the returns they expected. In these, effective change management clicked at every level: Senior and middle managers and front-line employees were all involved, responsibilities were clear, and the reasons for the change were understood throughout the organization. Conversely, companies that had problems at all three levels captured, on average, only 35% of the value they expected.

As in any business endeavor, consistent quality leadership and communications are essential. Recognizing change as a continuous process means change management is an ongoing feature of a leader’s job. A frequently overlooked component, however, is the integration of the realities of change and its impact on humans. People management is commonly regarded as an administrative concern, rather than strategic, and is rarely involved in any change project’s leadership thinking. Yet offering the right incentives to link corporate goals to individual career objectives is a critical success factor. What motivates people is an individual matter and needs to be addressed at this level.

A recent survey by training specialists Discovery Learning shows that people react differently to change, and can be classified in four broad categories. Originators welcome dramatic change; conservers prefer gradual change; pragmatists are most enthusiastic about change that will address current problems; and resisters dislike all change. Americans are typically attracted to innovation, so we believe being an originator is best. But it takes all of these personality types to build a successful business. Conservers at Enron tried to warn of problems, but the leadership culture was apparently skewed so much toward originators charged with ‘reinventing business’ that conservers were viewed as resisters and were either silenced or ignored.

The way people learn new things is also individualistic. Training programs that require speedy results need to be designed to accommodate the human need for context and relevance. The usual approach to rapid training, taking employees off-site for intensive training, is in fact misguided. Such courses tend to work against human nature, since they are typically an attempt to impart all the knowledge needed to all staff in one fell swoop, with little attempt to tailor it to a specific individual’s job or learning style. Further to this point, most jobs are rarely as technically demanding as the technicians who develop the course content assume. A person may need to learn 10 new things to do the job effectively, but may only encounter five in a normal work day, three over the next year, and two in exceptional circumstances, by which time the training will have been forgotten. On-the-job training coupled with self-paced e-learning and online help to deliver personalized assistance as required is in fact a more effective way of ensuring staff get training that is relevant to their jobs.

When integrated with proper incentives and performance criteria, effective training can be a powerful driver for change. Work-force flexibility, developing multifunctional workers who can adapt to a range of job requirements, is the centerpiece of many businesses that are trying to transform themselves to survive in the real economy. Few business leaders are daunted by the idea of changing their organization’s technology or processes, but many wring their hands in despair at the prospect of changing their people’s behavior. But changing human behavior is in fact more science than art. An increasing body of evidence shows that the process of organizational change has defined parameters that suggest what works and what doesn’t.

The overall process may be defined, but the elements needed to motivate a specific person are variable. A one-size-fits-all solution won’t work when the fundamental issue to be addressed is that people have individual needs, wants and concerns. Human behavior can be pushed and pulled in the right direction with an effective combination of incentives and disincentives – if the desire for change is created in the individual. Constant upheavals in the business environment mean that leaders must learn to master the process of implementing change, just as their employees must learn to accommodate change.

Microlending - The Global Distribution of Capital

The distribution of capital, along with other fundamental resource allocations, is central in the evolution of economic interactions from the ubiquitus power centric model of today to a network methodology that meets emerging requirements of the Global village.

Large credit markets, on which so many of our economic interactions rely, demand critical mass of information and duplicate transactions to support profitable arrangements (http://ideas.repec.org/p/sef/csefwp/36.html ) (Jappelli and Pagano 2000). These credit markets, however, do not address the real needs of the majority of the world's economy. The markets serve, in many respects, the economies of the past. Thus, as we depart from old way and head toward solutions that will support the new , the creation of solutions that arrange resources appropriately in light of Global economic realities is essential. There is evidence of a revolution in credit markets that reinforces this thinking. As the poorest among us gain access to resources, they will further push the rate of change and thus available capital in the emerging third world is a good sign for continued upheaval ahead.

Such is the power of microlending, a form of finance that is helping to eradicate poverty in countries all over the world. In rural India, for example, a loan of $50 can spell the difference between poverty and economic self-sufficiency for an entire family. Vinod Khosla, founding CEO of Sun Microsystems and a partner at the venture capital firm Kleiner Perkins, calls it "one of the most important economic phenomena since the advent of capitalism and Adam Smith."

Speaking at the Global Business and Global Poverty conference at Stanford Graduate School of Business, Khosla used the Indian organization SHARE Micro Finance Limited to illustrate microfinance. SHARE targets rural women in India whose per capita income is less than $8 a month—well below the World Bank poverty line of $30 a month. The organization lends each woman $50 to $100 to fund entrepreneurial projects proposed by the recipients. For example, a woman might open a market tea stall or small grocery or buy a rickshaw or bicycle to transport the wheat grown by her family to market. The rickshaw would allow her family to retain 50 percent of the profits from the wheat that would have gone to pay another transporter. On the high-tech end, some women have opened Internet kiosks that have become profitable within the first three months and have provided a livable wage within six months. "There are hundreds of examples like this," Khosla said.

In what Khosla calls a "virtuous pyramid scheme," SHARE lends money to eight-member women's groups. Because they are all part of the same community, the group members are under strong social pressure not to default. "It's embarrassing to default, and if one person does, the others have to make up for it," he said.

Critics argue that lending money in $50 increments is uneconomical and will lead to even greater burdens for the poor. The success of the more than 6,000 institutions doing some form of microfinance today has proven this wrong, said Khosla. "The phenomenon can draw economic resources on a worldwide and competitive basis," he said. Khosla urged listeners to join in the movement to remove regulations currently prohibiting microfinance organizations from obtaining necessary credit. Addressing the question of whether interest rates of 20 to 30 percent are usurious, he said: "Would you rather have no loan, or an interest rate of 25 percent? The alternative is a local money lender who charges 5 to 10 percent per day. So let's be pragmatic, let's get beyond superficial, ethical dilemmas."

Organizational Design: Hierarchy, Hyperarchy and Facing Business Reality

A business cannot be competitive selling a product for $2 that cost $200 to make. Amazingly many organizations today are operating with this type of knowledge yet continue to avoid making tough choices to address unprofitable financial dynamics in order to survive and possibly even prosper. Many of these organizations delay making tough choices until the consequences of their denials are so dire that their options evaporate and opportunities to rebound vanish; a self fulfilling demise. Why does this situation exist? It is the nature of traditional organizations and the very manner of their operation that greatly contribute to the circumstance. The power centric hierarchy of the old business model is at the center of many of these failings. This form of organization is typically unable to cope with fundamental change because of how it is designed and how it functions. If you fail to design your organization to be effective at grasping and navigating change, you will likely succumb to the same influences as others have.

A good example is Britannica, the former producer of encyclopedias. The organization realized it could not sell its product for more than it cost to make. Britannica was aware that its sales force, unnecessary as the result of technological change, was the company's major cost. The company also knew people bought Britannica to provide their children a quality reference resource that is now achieved by purchasing a PC which offers access to a huge sea of data via search engines. Despite Britannica having these facts, it refused to accept the need to restructure its business, and disaster resulted. The organization failed to deal with the brutal facts despite the obviousness of their circumstance.

The revolution in information technology is similar to the management revolution itself. What works for other organizations is apparent. The challenge is sluggish response, a consequence of hierarchy. Information moves up and down in gaps in hierarchical pyramids and each gap requires delay and effort. The World Wide Web is an example of “hyperarchy” a more appropriate and responsive system. It is based on the notion of network centric methodology and results in more rapid and digestible change. Decentralized design enables more rapid adoption. Old organizational designs that rely on a top down centralized hierarchy cannot cope with the new business age and dynamic. Speed and adoption are at the core of this new era and that is where the old design fails.

Within a completely flat structure, all information on the Web is available to everybody who has access. Hyperarchical is 'the pattern of amorphous and permeable corporate boundaries characteristic of the companies in Silicon Valley ' - the pattern described above. More conservative models offer no real alternative to the Brave New Web World, even in the medium term. Not only can $200 not compete with $1.50: old 'legacy systems' in management are as disadvantaged as they are in IT. The options are expiring fast. Quite soon, the choice will lie between the new model or nothing.

Power Centric vs. Network Centric Institutions : Schools, the Workplace & the Revolution

Organizations are evolving from a power centric linear relationship wherein those with means and access direct the production of those without, to a network centric exchange that encompasses shared risks and rewards among participants. The access to technology and communication at very low costs is a primary driver of this shift. Many of our institutions fail to adopt the new methodology because they were founded in the power centric mode. Shifting to the new paradigm would essentially remove power from those who in the past benefited from the power centric base. This is the central reason behind our major institutions present failings and ultimate demise. Two institutions that are common to most people’s experiences in “Western” society are schools and the workplace. Few better examples exists of institutions that are failing because their mode of operation has not departed from past and ineffective practices. However, successful groups and associations who adopt the network centric approach have emerged.

Our learning institutions, among others, are for the most part steeped in past tensed power centric and linear designs. These broken systems do not allow our children to learn using the new tools of the revolution. Ironically chalk boards, text books and bells signaling the industrial revolutions methods of work process, are very much the norm. Ivan Illych, whose ideas have gained widespread acceptance beyond fierce libertarians, opines on “schooling,” “deschooling” and democracy, eloquently addresses the point about what old method schools truly represent :

“The pupil is thereby “schooled” to confuse teaching with learning, grade advancement with education, a diploma with competence, and fluency with the ability to say something new. His imagination is “schooled” to accept service in place of value. Medical treatment is mistaken for health care, social work for the improvement of community life, police protection for safety, military poise for national security, the rat race for productive work. Health, learning, dignity, independence, and creative endeavor are defined as little more than the performance of the institutions which claim to serve these ends, and their improvement is made to depend on allocating more resources to the management of hospitals, schools, and other agencies in question.”

In new age learning institutions, democratic school s , students choose what they want to study, when they want to study it and how (see http://www.sudval.org). The structure of the school exists to facilitate the child’s choices and support them; using the tools of the knowledge age. Self-directed learning, based on utilization of the latest technologies, and equal say in governance, regardless of age, or position of authority is at the core of the philosophy. The institution is establishing a true network reflective of the manner in which the revolution will evolve both in our society and in our lives.

Similarly, the traditional workplace remains wrought with challenges. Some companies are beginning to understand the implications of the revolution on its people. Semco is a Brazilian company that was floundering 25 years ago with annual sales of $4 million U.S. Through his revolutionary approach; using methods where employees choose their own days of work, and set their own salaries. Semco now enjoys annual sales of $212 million and is growing at a rate of 20 to 30 percent a year.

Semler, who taught at MIT and Harvard Business School said: “If you wake up in a bad mood on Monday morning, you don’t have to come to work. We don’t even want you to come because you simply don’t feel like it and will therefore not make a contribution. We want employees who are ready and willing to work. If that means they only come twice a week, that’s okay. It’s about results.”

Shared risks and shared rewards; the basis of the new productive paradigm of network relationships. Failing to adopt networked approaches will result in failed organizational efforts.