Changing Business Paradigms in the 21st Century

Never before have business leaders faced the challenges they face today. Rapidly changing markets, increased global competition, the furious race to attract and retain unparalleled talent, technological forces, the ever-increasing role of artificial intelligence and learning systems in our everyday lives, the impact of industry on society and the environment, and the skyrocketing demands for sound corporate governance dictate that the old ways of doing business will cause some companies to completely disappear in the 21st century. This is nothing new. Companies come and go. Remember Zenith Electronics? American Motors? Detroit Steel? Collins Radio? All made the Fortune 500 list in the mid-20th century. None of these companies exist today. And how many of today’s Fortune 500 companies, names that no one had ever heard of in 1955, names like eBay, Walmart, and Apple, will exist in thirty years?

Mark Twain is reputed to have said “History doesn’t repeat itself but it often rhymes.” And he was right. Throughout history we have been faced with inflection points that, at the time, seemed untenable. Forces of change that were like nothing that had come before. Each time we learned to deal with them, and in most cases we were the better for it. But it is these very inflection points that define success and failure in a unique way. Some companies make it through them. Some don’t.

Remember the Borders bookselling chain? From the time the first store opened in Ann Arbor, MI, in the early 1970s and through two decades of growth, the company enjoyed a competitive advantage, due in part to superior inventory and distribution management and an ability to predict what consumers would buy. But a mere twenty-five years later, the company had lost its edge and in 2011 its remaining stores were shuttered. The failure of Borders’ leadership to effectively deal with changing technological forces and online buying trends, more than any other factor, drove the company to its ultimate demise. The Borders story is one of countless examples of companies that didn’t make it through points of inflection. Each situation was unique. But the overarching theme running through all of them is the failure of leadership to deal effectively with change.

History doesn’t repeat itself but it often rhymes.

As we near the two-decade mark of this century, we seem to be at an historic inflection point. While the economy is hot, and the stock market is setting records on what sometimes seems to be a weekly basis, there appears, to me anyway, to be valid justification for a healthy dose of angst. And an imperative that business leaders understand the forces of change and learn to deal with them effectively.

This imperative cuts across all aspects of an organization.

For example, a radically new way of assessing strategic alternatives from the standpoint of investment, risk and return is needed. While great changes have occurred in other areas of business leadership, most companies’ financial executives seem trapped in a paradigm that, with the exception of various passing trends such as activity based costing and economic value add, have remained largely unchanged for the past fifty years. It is no longer adequate or acceptable for companies to employ the traditional, backward looking cost/return models to make critical strategic decisions going forward. Also, it is no longer adequate or acceptable for financial executives to view costs and financial return only in “hard” terms, such as operating costs, capital expenditures, cash flow, etc. Nor can it be adequate or acceptable for companies to view financial strategy from the perspective of a one-quarter or even a one-year horizon.

How do we reconcile the fact that the traditional theory of the firm may very well be obsolete? (Back to the Drawing Board: Is the Traditional Theory of the Firm Obsolete?) The traditional company of the “Greatest Generation” controlled a discrete component of the value chain and operated largely in a linear fashion. The traditional strategic and economic approaches to business management and decision making worked quite well in that environment. Today’s companies are more fluid, much more non-linear, and the value chain is more ill-defined and ephemeral. Most of this change has occurred as a result of technology, globalization and changing labor dynamics.

How does the successful company of the 21st century assess the true strategic pros and cons of offshore manufacturing/outsourcing, or of automation and machine learning, not just from a basic “dollars and cents” perspective but taking into consideration much broader factors that, in the long run, will probably be much more significant than short-term return on investment? How does the executive of the 21st century effectively value such “soft” factors as stakeholder goodwill, social capital, human capital and environmental impact?

With the exception of certain “assembly-line” or routine job functions, we seem to be rapidly moving in the direction of universal “free agency”, whereby individuals will barter and negotiate their talent in exchange for personal rewards. The concept of employment has changed radically over the past fifty years and will continue to do so going forward. Is this a good thing for labor and society? Time will give us the answer. But the changes we face are inevitable. How do we deal with these changes?

Several responses come immediately to mind:

Risk and Uncertainty / Foresight and Simulation

A radically new approach is needed to assess, measure and manage risk and uncertainty. Traditional approaches use risk profiles based on historical, empirical experience. These models no longer work. Using concepts from such disciplines as gaming theory, artificial intelligence and machine learning systems will allow us look at risk and reward with a new set of eyes. We must move away from regression tools, which optimize history, to simulation tools, which focus on foresight. We must use these tools, not so much to predict the future, but to understand the range of possible future events (for example, the “cone of plausibility”, see Traditional Strategic Planning Models Don’t Work … There’s A Better Way) and how we can effectively deal with them.

The way we make financial decisions must be reevaluated. For example, the application of Black-Scholes methodologies to business decision making, in the form of real options valuation, and the use of Monte Carlo simulation and decision support systems, afford leaders the ability to make more informed decisions. These approaches to understanding the risks and rewards associated with future business decision options is very powerful and has broad applicability to strategic decision making in the face of uncertainty.

Dynamic and Fluid Business Models

The way we view the firm and its role in the business community must change. The view of businesses as static, hierarchical and linearly functioning entities no longer works. A dynamic, fluid and non-linear model is called for.

As I pointed out in the above-referenced article, the world is messy. Markets are messy. Business is messy. None of this lends itself to a linear approach. What’s needed is a non-linear process, with constant feedback loops and opportunities to adjust to an ever-changing terrain and the acquisition of new knowledge and insights.

In addition, successful companies must adopt a decision horizon that extends well beyond the next quarter, balanced against the reality that predictions of future events are not accurate. The key, as noted above, is not to predict the future but to plan effective responses to change.

Social Responsibility

As business leaders adopt a different mindset regarding human capital, “free agency” and the importance of a robust and well-cared-for labor market, they will look at these things from a more forward looking and long-term perspective.

Leaders in the 21st century need to focus on the “triple bottom line”: economic value to shareholders; value to the various stakeholders of the company, including employees, independent contractors, clients and vendors; and value to the community and the environment.

The concept of social responsibility and its impact on business success is not new but seems to be garnering increased scrutiny over the past few years (see, for example, When Corporations Fail at Doing Good).

Leaders who drive the successful companies of the future will radically reinvent the concept of value and the balance sheet, creating a second “balance sheet” that takes into consideration the “soft” contributors to business success, such as stakeholder goodwill, social capital, human capital, environmental impact, consumer buying behavior, customer retention, technology and brand awareness. These factors often don’t hit a company’s earnings and cash flow until it’s too late.

In summary, the today’s successful leaders will implement new models for managing sustainable value creation that (a) adopt radically different approaches to assessing risk and uncertainty that employ forward-looking as opposed to backward-analyzing models, not to predict the future but, rather, to understand how to manage it, (b) are dynamic, fluid, non-linear and leverage a long-term view, and (c) incorporate value to all stakeholders, the community and the environment, as well as shareholders, into the overall success formula.

Mike Cobb