In my book The End of Management I describe how complex managed systems such as businesses change. The short version is: they usually don’t. Most business systems are in stable equilibrium most of the time. This state can be thought of in terms of chaos theory and complexity theory. The gist of it is that firms only change when a shock to the system resulting from a drastic change to the environment, such as the current pandemic, knock them into a far from equilibrium state where the old rules are completely obsolete. People get lost in the resulting confusion.

Let’s think of business in chaos theory terms. The “organization” can be thought of as existing in the internal models of its employees. Organizational transformation refers to a transition between one dominant internal model and another. In stable equilibrium the internal model is embodied in the plans, procedures, and routines everyone follows on a day to day basis. The procedures and routines are embedded learning and they constitute the performance rules of the organization. The employees in the aggregation “Us” identify with a well-established tag (e.g., Intel). Intel means a certain way of thinking and doing things; i.e., Intel means that a certain set of rules are followed in determining the appropriate response to messages from the environment. At one time this meant “Intel, the memory chip company.”

During transformation the firm is moved far from equilibrium by some environmental shock that it has detected. In the 1970’s the shock to Intel’s environment was that memory chips had become a commodity. This leads to doubt about the internal models, which no longer produce the expected payoffs. The plans which represent these rules are called into question. At first this leads to what I call “Type I Strategic dissonance.” In this phase the main aggregation continues to follow the old performance rules and perform the same routines, despite the apparent failure to produce the expected results. In complexity theory terms, the same messages are posted and the same performance rules applied, but these rules no longer produce the same payoffs as they once did. Sales and profits no longer flow from Intel’s efforts.

Usually in moving to a far from equilibrium state the firm leaves stable equilibrium with a jolt and goes into chaos. Here no rules are available. The organization is no longer a complicated managed system. The old control mechanisms no longer micro-manage employee behavior, but there are no general rules to guide behavior either. Confusion reigns. This can, and often does, lead to failure and extinction. However, if the organization survives long enough, some employees will discover new rules that are effective. That is, the employees learn that new ways of responding to messages from the environment result in a higher payoff. Resource flows are redirected to the areas with higher payoffs, especially those where non-linearities (multipliers) exist. This leads to “Type II Strategic Dissonance” as leaders now act in new ways but often continue to espouse the familiar old performance rules in their communications.

As the rule discovery process continues, a new order emerges from the chaos, one which is able to deal effectively with the new environment. As the new rules become embedded in procedures and routines, new internal models emerge. A new aggregation forms around the tag. Intel, the memory company, is dead. Long live Intel, the microcomputer chip company! If the environment stabilizes for long enough, a new stable equilibrium may be reached. The firm creates new forecasts, strategic plans, command structures and control systems. The cycle will repeat itself sometime in the future, but for the time being we have a new stable equilibrium.

Now consider the current COVID-19 pandemic. It is the biggest shock to the business environment in history. No person or organization is beyond its effect. The entire world is in a far from equilibrium state. If there was ever a time when business as usual doesn’t work, it’s now. At the moment that I write this — day 15 of the first 15 day shelter in place order — chaos reigns. Now is the time to consider new ways to behave going forward. Carefully study the new external environment to discover new rules for operating. What opportunities will exist when we emerge from this that didn’t exist before. What is the long-term effect of massive numbers of work-at-home employees? Which employees actually need to travel to their place of work and which can work remotely? For that matter, which employees need to be employees? Can you become an independent agent instead of an employee? Should work itself continue to exist as in the past, or is it time for radically reorganizing work? Which kids need to attend a physical school and which can learn remotely? Do you need to live in a city or can you make a living anywhere?

I don’t mean to sound callus in this time of suffering. I realize that we are all fearful and I sympathize with the people who are infected with this terrible virus. But there are silver linings to this horrible cloud if we look for them.

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