Adaptive Enterprise: Creating and Leading Sense-and-Respond Organizations by Stephan H. Haeckel, Haeckel, Adrian J. Slywotsky (Foreword by)

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Can large, complex organizations possibly adapt in a systematic way to the unpredictable demands of rapid, relentless change? Yes, says Stephan Haeckel-if the organization is designed and managed as an adaptive system. In fact, the only kind of strategy that makes sense in the face of change is a strategy to become adaptive. In Adaptive Enterprise, Haeckel outlines the new sense-and-respond business model that helps companies anticipate, adapt, and respond to continually changing customer needs. He maps out a step-by-step plan that firms can use to transform themselves into a new type of organization, one where change is not a problem to be solved, but rather a source of energy, growth, and value. Adaptive Enterprise is both a new way of thinking about business, and a prescription for leadership of post-industrial organizations. It is, as Adrian Slywotzky says in his foreword, "a book that will influence the influencers of business thought."

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Table of Contents

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Chapter 5: Adaptiveness: Finding Meaning in Apparent Noise

In the old economy, the challenge for management is to make
product. Now the challenge for management is to make sense.
  -JOHN SEELY BROWN

You can observe a lot just by watching.
  -YOGI BERRA

THE ADAPTIVENESS OF SENSE-AND-RESPOND ORGANIZATIONS stems from two sources: the modularity of its capabilities and how people accountable for those capabilities process information. In earlier chapters I discussed the flexibility that comes from dispatching modular capabilities in response to current requests. Now we will consider ways of enhancing the adaptiveness of the individuals accountable for creating those responses.

Every adaptive system, whether an individual living creature, a computer virus, or a large organization, survives by making sense out of its environment and responding with an appropriate action. It then repeats the cycle, factoring in the results of the previous one. In this circular and continuous process, the adaptive system senses its environment even as it acts. The distinguishing quality of individual humans and human organizations is their ability to make conscious decisions about what things to sense, how to interpret them, and how to respond to the interpretation.

The generic adaptive loop shown in Figure 5.1 presents a schematic view of this process that applies equally to all adaptive systems. An adaptive system must first sense what is going on in its environment. Different systems have different capacities in this regard. Dogs, cats, and people, for example, hear, feel, and smell different signals.They are therefore aware of different realities. As a system, each must interpret the data it has registered, separating meaningful signals from noise, the flood of random stimuli with no relevance to its survival or success. It discovers meaning in the data by looking for patterns related to some previous experience or known concept. The system must then decide what do in response. Finally, it must act on its decision. This sequence may be automatic and reflexive or conscious and reflective. Once a cycle is completed, a new one begins, in which the system incorporates the outcomes of the previous cycle with any newly perceived environmental signals.

Complexity scientist Seth Lloyd has derived an important principle about the sensemaking requirements of adaptive systems. His insight can be paraphrased as: Successfully adapting systems have the property of translating apparent noise into meaning at a faster rate than the arrival rate of apparent noise. Lloyd's principle about the primacy of sensemaking as an adaptive competence is echoed by Brian Arthur in his prescription for survival in increasing return economies.

[T]he challenge to management in this game is not so much to optimize ... or to lay their bets just right. Instead, the challenge is to make better sense out of the situation than the next guy.... The strategic challenge here is a cognitive one.... [W]hat frameworks do they wheel up to understand the situation? ... A system that is to [adapt] successfully ... must adapt by constructing models that allow it to decide what information to get, and how to act on it.

The distinction between real noise-pure randomness, against which no strategy can prevail-and apparent noise is very important. Data with no meaning in the existing framework, or context, may have meaning in some other context. This is where people come in. Our capacity to invoke meaning by drawing on analogous experience in other contexts is an enormous advantage when making sense out of new signals from the environment. Flatworms, computer viruses, chemical clocks, tornadoes, and other complex adaptive systems cannot do this. Humans, it seems uniquely, can consciously adapt the context itself as well as adapting within it. The hierarchy of adaptive contexts within which Westpac's loan officers, product managers, and system designers worked illustrates this. Adapting organizational context is the key to keeping a business viable in discontinuous change. It is a critical leadership competence in sense-and-respond organizations.

The adaptive loop begins with and is fueled by data. The system must transform this data into information and knowledge before it can take action. Adaptive organizations possess the survival trait of making rapid and continuous iterations around this loop. Make-and-sell companies cycle through this loop, too, adapting gradually to gradual change, but in a different way. A bus company, to return to the previous chapter's example, will do market research to sense people's transportation needs, and will use models to interpret what this data mean for bus utilization rates. Its analysts will interpret the data, looking for patterns useful for predieting new customer needs and company opportunities. Then the company's leadership will decide whether or not to buy new busses, hire more drivers, or modify their schedules. Finally, they will have to act on those decisions. The bus company, like other make-and-sell companies, resists change and tends to rationalize or ignore signals that suggest its necessity. They find it very advantageous to stay in the act phase as long as possible, because the efficiency of tightly integrated make-and-sell operations depends on stability. Change is disruptive and undermines efficiency. Such companies are, therefore, predisposed to seal themselves off from their environment. They act as if stable conditions prevail-until the environment changes enough to confront them with a crisis, such as the one that forced Westpac, out of desperation, to adopt a radically different strategy. Make-and-sell organizations attempt to act like closed systems. As noted earlier, they focus on internal information, investing attention and energy in making their procedures more efficient rather than in looking for signs of change. In so doing, they risk getting better and better at doing the wrong thing.

In contrast, sense-and-respond organizations are open systems. Instead of resisting change, they actively seek out the slightest hints of it. They do this not only to improve their reaction time, but to detect as soon as possible meaningful differences in individual customers' needs. They equip themselves to exploit the value of differences, as well as similarities, between customers. At the same time, and just as systematically, they look for early indications of new capabilities that would enable them to respond better to the needs identified. Once sense-and-respond organizations become good at cycling rapidly through the adaptive loop, they experience the increasing returns effects described by Brian Arthur. Companies that take longer to cycle through the loop fall farther and farther behind.

SENSE

In a competitive sense-and-respond world, sensing the obvious is not enough. Rapid listen-and-comply is responsive, but anticipate and preempt is decisive. Successfully proactive, adaptive systems must register implicit and tacit signals as well as explicit ones. Sometimes customers literally do not know what they need. Their articulated responses to market research questionnaires will be wrong, incomplete, or both. One researcher has estimated that as much as 80 percent of human communication is nonverbal. Context, inflection, body language, and other behaviors often convey more meaning than do the words they accompany. To understand as early as possible the customer's underlying, unarticulated request, organizations must invest in collecting signals that may not appear to be requests at all.

Several years ago, for example, automobile manufacturers placed video cameras in parking lots to record people as they got in and out of their cars. In airport parking lots, researchers repeatedly saw travelers straining to lift heavy suitcases over the high lower lips then typical in trunk design. Cameras in mall parking lots recorded the expressions and body language of the many shoppers who arrived at their cars with drinks in hand. A significant number of drinks were spilled, evoking, most of the time, unequivocally negative reactions. These signals, previously hidden in the noise of the world around us, were subsequently interpreted as implicit requests for lower trunk lips and for drink holders. Now these features are standard equipment on virtually every automobile manufactured....