The Ability and Motivation of Large Corporations - Essay Example

Running Head: MODERN CAPITALISM The Creation of Modern Capitalism of the of the The Creation of Modern Capitalism Introduction During the past few decades, however, it has become increasingly clear that many technologies developed during this period contribute to the destruction of the very ecological systems on which the economy depends: the specters of toxic contamination, depleted forests and fisheries, eroded soils, loss of biodiversity, global climate change, burgeoning population growth, and a widening gap between rich and poor are explicit signals that managers must rethink the social and environmental impact of their technologies, products, and processes. In the absence of dramatic change, we are destined to devolve into a world of environmental degradation, social upheaval, and mass migration. Creative Destruction and the Industry Waves of scientific and technological discovery or major periods of socioeconomic change drive episodes of creative destruction. We are now in the early stages of such a revolution, the transformation toward sustainable development. Most large corporations developed in an era of abundant raw materials, cheap energy, and limitless sinks for waste disposal. While successful in reestablishing the legitimacy of an industry under tremendous public pressure, Responsible Care has failed to address the fundamental underlying problems associated with the chemical industry; many of its products and processes are highly toxic, resource intensive, and continue to place enormous pressures on air and water resources. (Abernathy, 1978, 41) As the corporation ages, the bureaucracy begins to settle in. Passions cool and are replaced by "rational decision making," often simply the codification of what has worked in the past. Data are gathered, analysis is performed, alternatives are postulated, and scenarios are developed. Attempts are made to avoid the game of information sculpting. Only when rational decision making is in vogue does all the relevant information flow to the right decision maker, at the right time, and in the right form to be easily analyzed and interpreted. Rational decision making is triumphant, at least for a while. This stage is often pictured as the normal state of the corporation, although in our experience, particularly as the pace of change increases, rarely does this ideal state accurately describe how the company actually operates. Eventually, rational decision making reveals that the future potential of the business is limited. Often, at this point, threatened by the prospect of a bleak future, the corporation falls back on defensive routines to protect the organization from its fate, just as defensive emotions emerge in our lives when we sense impending trauma. Management now sees the future filled more with trouble than with promise. Decisions are made to protect existing businesses. The fear of discarding the old for the new (product cannibalization), the fear of channel conflict, and the fear of earnings dilution through acquisition paralyze acts of creative destruction and often effectively shield the corporation from the perception of future trouble--as well as the need to act--for a long time. Cultural lock-in is established, thwarting the emergence of a leader or team that might save the day. The causes of cultural lock-in Why does cultural lock-in occur The heart of the problem is the formation of hidden sets of rules, or mental models, that once formed are extremely difficult to change. Mental models are the core concepts of the corporation, the beliefs and assumptions, the cause-and-effect relationships, the guidelines for interpreting language and signals, the stories repeated within the corporate walls. Charlie Munger, a longtime friend of and co-investor with Warren Buffett and vice chairman of Berkshire Hathaway, calls mental models the "theoretical frameworks that help investors better understand the world." Mental models are invisible in the corporation. They are neither explicit nor examined, but they are pervasive. When well crafted, mental models allow management to anticipate the future and solve problems. But once constructed, mental models become self-reinforcing, self-sustaining, and self-limiting. And when mental models are out of sync with reality, they cause management to make forecasting errors and poor decisions. The assumption of continuity, in fact, is precisely the kind of disconnect with reality that leads corporations into flawed forecasting and poor decisions. Mental models manifest themselves in corporate-control systems. These systems are designed to ensure the predictable achievement of goals, whether cost control, the control of capital expenditures, or the control of the deployment of key personnel. Effective control means that an informed manager can be reasonably confident that unpleasant surprises will not occur. Unfortunately, control systems can also create "defensive routines" in organizations, including the failure to challenge the status quo, the failure to encourage a diversity of opinions, the failure to disagree with superiors (thereby displeasing them), communicating in ambiguous and inconsistent ways, and making these failures, even when known, "undiscussable." Change becomes impossible. Corporate-control systems also undermine the ability of the organization to innovate at the pace and scale of the market. Under the assumption of continuity, for example, the arguments for building a new business can be turned back, since its probable success cannot be proved in advance. Under these circumstances, it is more likely that ideas based on the incremental growth of current capabilities and mental models will be encouraged. Corporate-control systems limit creativity through their dependence on convergent thinking. Convergent thinking focuses on clear problems and provides well-known solutions quickly. It thrives on focus. Order, simplicity, routine, clear responsibilities, unambiguous measurement systems, and predictability are the bedrock of convergent thinking. Convergent thinking is tailor-made for the assumption of continuity. Convergent thinking can be effective at handling small, incremental changes and differences, but transformational changes completely flummox the system. Discontinuity, on the other hand, thrives on a different kind of thinking, divergent thinking. Divergent thinking focuses on broadening--diverging-the context of decision making. It is initially more concerned with questions than with getting to the answer in the fastest possible way. Divergent thinking places enormous value on getting the questions right and then relinquishes control to conventional convergent-thinking processes. Divergent thinking thrives as much on the broad search as on the focused search. It focuses as much on careful observation of the facts as on interpretation of the facts. It focuses as much on the skills of reflection (which requires time away from the problem) as on the skills of swift decision making (which seeks to avoid delay). We refer to these three skills--conversation, observation, and reflection--as the COR skills of divergent thinking. Unfortunately, conventional corporate-control systems, built on the assumption of continuity, stifle the COR skills of divergent thinking or kill it outright. As an industry-level collaborative process, the Responsible Care program has fostered incremental improvement by forcing laggard chemical firms to mimic the leaders in terms of environmental management. This has left the leading firms such as Dow and DuPont in a stronger competitive position by helping to shore up support for their right to operate but, ironically, has reduced the likelihood of fundamental innovation by chemical industry incumbents. If we reflect on the commonly held definition that sustainable development is the ability of the current generation to meet its needs without compromising the ability of future generations to meet theirs, we can see how most existing products and processes fail to meet this criterion. (Abernathy, 1978, 45) Growing data suggest that today's extractive and material-intensive industries (for example, mining, energy, chemicals, forest products, agriculture, and transportation) are not environmentally sustainable. If the entire world were as materially intensive as North America, it would take three planet Earths to support the material requirements of the current world population. The challenge of global sustainability should thus be viewed as a major discontinuity with the power to radically transform the structure of many industries. Visionary companies have an opportunity to drive the redefinition and redesign of their industries toward sustainability. Material- and energy-intensive industries will find global sustainability to be a competency-destroying challenge that calls for radical repositioning and new competency development. Information- and service-intensive industries will find global sustainability to be a competency-enhancing challenge that offers significant potential for substitution and leapfrogging over existing unsustainable technologies. Overall, innovators and entrepreneurs will view sustainable development as one of the biggest business opportunities in the history of commerce. Even in the chemical industry, the early stages of creative destruction can be discerned. Some chemical companies have begun to reposition themselves. Leaders such as Monsanto and DuPont are questioning whether the industry can remain committed to using petroleum feedstocks and toxic materials (unsustainable). They are betting that they can realize higher performance by shifting to biologically-derived, more benign materials (potentially sustainable). During the past decade, demergers, spin-offs, acquisitions, and significant new technology developments have structurally transformed the chemical industry. DuPont recently divested Conoco to focus on products with higher service and information content. Monsanto, Hoechst, and Rhone-Poulenc have spun off their chemical businesses to concentrate on life sciences, food, pharmaceuticals, and biotechnology. ICI, Sandoz, and Ciba-Geigy have refocused on chemicals by spinning off their life sciences and biotechnology investments (for example, the creation of Zeneca and Novartis). Dow and DuPont are ramping up significant investments in biotechnology. Other firms, such as Novo Nordisk, the fast-growing Danish pharmaceutical and biotechnology company, and Empresas La Moderna, an emerging life sciences powerhouse, are exploring "green chemistry" and finding biological substitutes for synthetic chemicals. Almost every energy- and material-intensive industry from oil to automobiles is experiencing similar changes. In ways that are not yet completely clear, the challenge of global sustainability has begun to drive the process of creative destruction. Yet many managers resist or discount sustainable development as a business driver, arguing that its ill-defined, contestable nature renders any action premature. However, strategy is concerned with taking action under conditions of uncertainty or even ambiguity. Managers need the foresight to see opportunity where they now see only chaos or rhetoric. In the next section, we describe new lenses with which managers can identify business opportunities driven by transformation to global sustainability. In the developed, consumer economy, nearly 1 billion global customers have the purchasing power to afford anything they desire. The infrastructure enables the rapid manufacturing and distribution of products and services, and consumption occurs at high levels. (Christensen, 1996, 197) In the emerging economy (roughly 2 billion people), basic consumer needs are met; customers have minimal purchasing power. There is little extravagance, but no desperation. Rapid industrialization and urban migration are increasing the demand for additional products and services for this large, rapidly growing market. In the consumer economy, many of the resource- and energy-intensive industries serving people's needs -- chemicals, automobiles, oil, and mining, to name a few -- leave very large corporate footprints. Product systems with large footprints are usually based on mature technologies. As technologies mature, they reach a point at which even large additional investments in technical development yield only small gains in performance. The combination of large footprint and technological maturity forms openings for creative destruction. (Christensen, 1996, 199) At this point, innovation begins to appear as entrepreneurs with radically new technologies generate significant performance gains with comparatively modest investments. Mature technologies cause the gap between price and life-cycle cost to widen and grow, resulting in both technological and environmental forces that drive creative destruction. To identify sustainability-driven opportunities for the consumer economy, managers must ask: DuPont sees the high earnings, cash flow, and intellectual content (R&D/capital) of the differentiated businesses as future models. Foundation businesses represent opportunities for improvement and repositioning. DuPont has divested large-footprint, low knowledge-intensity enterprises to fuel future growth in the differentiated businesses. During the next several years, DuPont will identify and launch entirely new businesses and is systematically reducing its corporate footprint by removing material content from its products in favor of service and information content. In the telecommunications industry, some companies are exploring ways to make existing, resource-intensive products obsolete. Companies such as Hewlett-Packard and Lucent Technologies are substituting information for energy and material use. They view e-mail, telecommuting, teleconferencing, and Internet transactions as ways to dramatically reduce overall levels of material and energy consumption. While less than one-third of the world's population now lives in urban areas, during the next few decades, well over two-thirds will. In China alone, nearly 300 million people are expected to migrate to cities during the next twenty years (more than the current population of all of North America). (Cooper, 1992, 121) Rapid urbanization and industrialization, together with increased demand for products and services, are placing intense pressure on ecological and social systems. Technologies that previously fueled the development of the consumer economy will be inadequate for meeting those future demands without exceeding nature's capacity for replenishment. Avoiding a collision between rapidly growing demand and a stable or diminishing stock of material supply will be the biggest challenge in emerging economies. Nevertheless, demand for products and services continues to rise. In meeting growing demands, however, firms have replicated the same strategies, products, and processes that were successful in the consumer economy. Given the scale and speed of development in the emerging economy, however, a repeat performance of the consumer economy is almost certain to lead to environmental meltdown. Sustainable development of the emerging economy will depend on firms' ability to meet rapidly growing demands without repeating wasteful, outdated practices. (Abernathy, 1978, 47) Because of the high rate of manufacturing growth in the emerging economy, the capital stock in manufacturing is being replaced rapidly. In Asia, for example, the equipment stock of manufacturing plants doubles every six years. Thus, firms can leapfrog to clean (closed-loop, zero discharge) manufacturing technologies. Technological leapfrogging will be essential if economic development continues at the rates required to keep people out of poverty. A company's challenge in the survival economy is to meet the basic needs of the poor so that they develop a solid economic foundation and increase their quality of life. Few managers seriously consider those whose needs are not being met by their company's current product or service portfolio. Establishing and growing the sales presence in the survival economy is an important measure of progress toward that goal. Strategies that build the social infrastructure of potential markets through education, training, and increased worker wages are also important. Companies can introduce products and services on a small-scale to enhance local community development and alleviate pressures for urbanization rather than engaging in large-scale, centralized projects that degrade rural communities and encourage urban migration. Creating a strong position that taps into this vast, emergent market will help position a company for meeting humanity's future needs and demands. Over the long term, investment in the survival economy should improve the company's price-earnings ratio and share of new wealth creation. Conclusion Schumpeter was skeptical of the ability and motivation of large, incumbent corporations to drive the process of creative destruction, but he did not dismiss them entirely. He thought that large investments in an installed asset base and misaligned managerial incentives would reduce incumbents' motivation to make their established positions obsolete. Yet he also recognized that, paradoxically, large corporations have financial, technical, and organizational resources that cannot be matched by small, entrepreneurial new entrants: "... it may happen that new combinations should be carried out by the same people who control the productive or commercial process which is to be displaced by the new." To capture sustainable opportunities, managers must fundamentally rethink their prevailing views about strategy, technology, and markets. Focused attention through the three lenses -- consumer, emerging, and survival economies -- will enable them to see new business opportunities. New metrics focused on global sustainability will help managers identify the opportunities that will lead to those innovations. Managers who treat sustainable development as an opportunity will drive the creative destruction process and build the foundation to compete in the twenty-first century. References Abernathy, W. and J. 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