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Climate Change and Evidence-based Management: An Ecological Perspective [Part I]

In the Wall Street Journal over the weekend, British science writer Matt Ridley wrote another one of his provocative essays around his theme of “rational optimism”. [In 2010 Ridley wrote a book, The Rational Optimist, which I reviewed for Strategy+Business.] This time he tackled the question as to whether the earth is running out of resources. He cited the poor predictions of ecologists and contrasted them unfavorably with those of the economists. He concluded, based on his interpretation of the evidence, that the planet wasn’t running out of resources; hence the grounds for his optimism.

Ridley is also the past non-executive Chairman of Northern Rock, the British bank that went insolvent during the credit market seize-up in 2007 that precede the financial crash of ’08. Northern Rock was the first British bank to go insolvent in 150 years and over time evidence emerged that company had been pursuing a highly-leveraged, high-growth business model and had not made adequate contingency arrangements in the event that the credit markets were to freeze. You would never know this, however, from reading the transcripts from the parliamentary enquiry held in the immediate aftermath of the bank’s failure. Despite every effort of the parliamentarians to get the top management group to admit that they had made mistakes and to suggest how they might have acted differently, the group adamantly refused to admit that they had made any errors.  Here is a key exchange:

Q404  Mr Fallon [Treasury Committee, Conservative Member of Parliament]: But a heavily leveraged bet on the movement of interest rates and on capital markets remaining open for an over-exposed model like this seems to me a fairly basic banking error, is it not?

Dr Ridley: We were subject to a completely unpredicted and unpredictable closing of the world credit markets. Our model was entirely transparent to the market and to the regulator. It was discussed regularly with both and it was not at the time seen as running a particularly high risk in terms of liquidity.

Q405  Mr Fallon: But it was your duty as Chairman and as a Board to ensure that your bank was liquid.

Dr Ridley: We reviewed liquidity regularly and we reviewed our policy on liquidity and our policy on funding regularly.

Q406  Mr Fallon: But you were wrong?

Dr Ridley: We were hit by an unexpected and unpredictable concatenation of events.

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Posted in Change, General | Tagged Clayton Christensen, data, ecological perspective, ecology, economics, innovation, judgement, Matt Ridley, Northern Rock, prediction, resources | Comments Off on Climate Change and Evidence-based Management: An Ecological Perspective [Part I]

Economics as a Moral Science and the Capitalist Dilemma: An Ecological Perspective

As I mentioned last week, Kenneth Boulding was and is my favourite economist and I was reminded again of his work when I came across a New York Times article on capitalism and the Dalai Lama. In it His Holiness suggests that wielding capitalism for good requires a deep moral awareness. Over forty years ago, in his 1968 address to the American Economic Association Boulding outlined his view why economics, like all sciences, could never be value-free for long. In the subsequent article, entitled “Economics as a Moral Science”, he wrote that science is a learning process that ran into two broad difficulties as it proceeded. The first of these was a “generalized Heisenberg principle”: “When we are trying to obtain knowledge about a system by changing its inputs and outputs of information, these…will change the system itself… (sometimes) radically”. The second difficulty is related – that science does not investigate an objective, unchanging world but actually creates the world it is investigating: it moves from pure knowledge to control. At this stage values at all levels in the society become critical.

When it came to economics, Boulding saw it as recording the results of a learning process that involves three systems – threat, exchange and integrative. Threat is the use of power: “Do something nice for me or I will do something nasty to you”. Exchange, as its name suggests, is “Do this for me and I will do that for you”. The integrative system is all about relationships: “Do this for me because of the quality of our relationship”. These triadic sortings are very common in the social sciences. Boulding mentioned the compulsory, contractual and familistic categories of sociologist Pitirim Sorokin and in The New Ecology of Leadership I listed eight others. These ranged from philosopher John Dewey’s impulse, intelligence, habit to management academic Jeffrey Pfeffer’s emergent, rational, constrained, all of which informed the trio of passion, reason and power in the ecocycle.

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Posted in Change, General | Tagged Adam Smith, Alfred Marshall, capitalist dilemma, Clayton Christensen, Dalai Lama, ecocycle, economics, evolutionary perspective, exchange, integration, Jeffrey Pfeffer, John Dewey, Kenneth Boulding, Maynard Keynes, Milton Friedman, moral science, Paul Samuelson, Pitirim Sorokin, real world economics, threat | Comments Off on Economics as a Moral Science and the Capitalist Dilemma: An Ecological Perspective

Don’t Throw the Past Away

The late Kenneth Boulding, environmental advisor to JFK and one of my favourite economists, once said that “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad – or an economist.” I used that quote last week to open my talk to a particularly rambunctious group of Rotarians in Kamloops BC. I went on to suggest that this topic – the future of material growth on an increasingly crowded planet must become the central question in the 21st Century. This is despite that fact that mainstream economics seems incapable of grappling with it. The message was very well received and during the question period we had a discussion of the need to find new concepts of nonmaterial wealth of the kind one finds in community relationships – a topic that is close to the hearts of Rotarians everywhere. There were also intellectuals around; I was especially pleased when one of the Rotarians complained to me at the end, “You didn’t mention my favourite poet, William Blake.” I knew exactly where she was coming from, as I am a longtime fan of literary critic Northrop Frye’s writings and artist, poet and religious mystic William Blake (1757-1827) was a favourite of his too.

A central thread running through my activities in Kamloops was “sustainability” as later that day I went on to talk to an MBA class as well as an undergraduate HR conference on “Bridging the Generation Gap”. The ecological perspective proved especially useful in the latter session. The title of my topic was “Don’t Throw the Past Away” and I used the ecological perspective to highlight the way in which many countries in the West discard the elders in society so that that they play little or no role in nurturing the next generations. This dynamic is apparent in almost all the advertising one sees from the investment industry, which plays up retirement as a time of total self-indulgence and complete relaxation and implies that retired people have no useful role to play in society. No wonder they get discarded!

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Posted in Change, General | Tagged ancestor, ecocycle, Erik Erikson, generation gap, identity, Kamloops, Kenneth Boulding, narrative, Northrop Frye, psychosocial development, retirement, Rotary, sustainability, William Blake | Comments Off on Don’t Throw the Past Away

The Nature of Uncertainty: Hunting Black Swans

This past week I gave the opening keynote at the 2014 Conference Board meeting on Enterprise Risk Management. It gave me an opportunity to bring an ecological perspective to risk and uncertainty as well as allowing me to promote The New Ecology of Leadership, which was featured in the program. I really like these occasions when I am challenged to use the ecological mental model to understand a new area as I learn both about the new area as well as get to understand the mental model better. I also get to meet other people working in related fields. In this case I was particularly pleased to meet Guntram Werther, a professor of strategic management at The Fox School of Business at Temple University. He is a critic of Nassim Taleb’s “strong form” view of so-called “black swan” events, using holistic, “syncretic” thinking. This consists of “…proper situational awareness, insightful lessons from history, multiple perspectives, cognitive shifting, intuition and insight into multiplayer intentions, their implications and shifting contexts and other information-integrating logics.” I believe that an ecological mental model is one way of going about such thinking.

I used Michael Mauboussin’s definition of uncertainty as “when you don’t know what’s going to happen and you don’t know what the probability distribution looks like”, which means that risk is “when you don’t know what’s going to happen but you do know what the probability distribution looks like”. I suggested that it was instructive to look at nature as a “manager” of uncertainty and the evolution of systems that handle uncertainty without conscious direction by:

• Always developing multiple options
• Creating contexts for growth
• Allowing the best fitted to emerge
• Testing the system continually

At the same time I repeated statistician George Box’s comment that “Models, of course, are never true, but fortunately it is only necessary that they be useful.”

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Posted in Change, General, Leadership, Strategy | Tagged algorithm, black swans, Cohen and Gooch, Confucius, COSO, Enterprise Risk Management, George Box, Guntram Werther, Jung, Kant, knowledge, Michael Mauboussin, models, Nassim Taleb, pattern, phronesis, risk, syncretic thinking, T-shaped, uncertainty, understanding | Comments Off on The Nature of Uncertainty: Hunting Black Swans

Exploring Leadership Using Metaphors

Last week I spent a day-and-a-half with a group of senior managers from a large global company discussing leadership. The company faces all the challenges one might expect it to face – globalization, digitization, cross-cultural difficulties and so on in a VUCA world i.e. one that is Volatile, Uncertain, Complex and Ambiguous.

Our topic was leadership and our medium was metaphor. A few weeks ago I blogged about the role and power of metaphors in management and the original meaning of the word – from the Greek meta (beyond) and pherein (carry). Our detailed sub-topics were “setting direction”, “building alignment” and “creating commitment” and we began by outlining the challenges the company faces using the well-known instrument Visual Explorer, developed by David Horth and Chuck Palus at the Center for Creative Leadership (CCL). It consists of hundreds of images from which participants are typically asked to select one that connects with their challenge.  They then discuss their images in their teams and present their thinking to the group as a whole. The image on the left represents a typical choice; the company’s challenge is like putting together a complex puzzle without the picture on the box to guide the people. An excellent discussion then ensued about who had the picture or whether the puzzle that is the future comes in a box with a picture at all!

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Posted in Change, General, Leadership, Strategy | Tagged budget, CCL, Chuck Palus, David Horth, ecological perspective, financial forecasting, Leadership Metaphor Explorer, mental model, metaphor, performance management, The New Ecology of Leadership, Visual Explorer, VUCA | Comments Off on Exploring Leadership Using Metaphors

Learning: The Power of Simulations

Last week I facilitated a day-long course on the “Fundamentals of Finance for Decision Making” as part of the DeGroote Executive Education program. I was using the Apples & Oranges simulation from the Swedish company, Celemi. I say “facilitated”, rather than “taught” because the essence of Celemi’s approach is for coaches to create contexts for learning, not for teachers to teach.  Today, with educators talking about “flipping the classroom”, the physical simulations from Celemi show the power of having people together physically and how to use that time and context to the greatest advantage. The results cannot be matched by any lecture-type formats.

I began working with Apples & Oranges about fifteen years ago, when I was designing and delivering executive development programs in Hong Kong and China. In my opinion it is the finest vehicle bar none for managers to learn the basics of finance and accounting. Teams of four work around a simulation board for a whole day, following the fortunes of a company as it conducts business for three years. The teams track half a dozen value streams and are active in the process of transforming value from one category to another. When they make mistakes they help each other get back on track. Raw materials become work-in-process with the addition of labour, which is then transformed into finished goods. Invoices become accounts receivable and receivables become cash, which it becomes clear is the hub value category for the business; “profits are fiction – cash is reality”.

At the end of each three-period year every team member prepares financial statements – profit and loss and balance sheet, with special attention to the role of cash and the impact of decision-making on cash. During the course of the three years they perform a management turnaround – increasing the velocity of working capital – they conduct a growth strategy, once again with special attention to the impact of these moves on cash. They come to understand the complexity of integrating and judging the effects of multiple improvement programs. Since I last worked with Apples & Oranges Celemi have updated the simulation and made it much more powerful. Today one can customize it do deal with the issues faced by single organizations and can discuss advanced financial concepts like Economic Value Added (EVA) and how to calculate a Weighted Average Cost of Capital.

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Posted in Change, General | Tagged Alfred North Whitehead, Apples & Oranges, Celemi, Center for Creative Leadership, DeGroote, ecocycle, EVA, Hartwick College, Klas Mellander, learning, simulations, teaching | Comments Off on Learning: The Power of Simulations

The Great Transformation – Getting a Handle on Wicked Problems at the 2014 Global Drucker Forum

The theme for the 6^th Global Peter Drucker Forum to be held in Vienna November 13-14 is “The Great Transformation – Managing Our Way to Prosperity”. The launch event took place in that city last week. Over 120 people gathered there to discuss the theme and some of the sub-topics that are likely to be raised at the meeting.

The inspiration for the meeting’s theme comes from a general feeling of malaise in the West. Since the Great Recession of ’08 there has been a weak cyclical recovery that has not yet seen the major economies reach their pre-crash levels. Unemployment and debt levels remain high, social security systems are underfunded and many of the structural problems that precipitated the crash remain unaddressed. A host of longer-term issues remain untouched. In the past technological advances have bailed us out of these kinds of situations, creating growth and jobs. This time there is concern about how much growth the new digital technologies will create and a real worry that they will destroy rather than create jobs. At the same time there are concerns about the ability of politicians to sort out the mess and most mainstream economists seem powerless to help them think through the issues.

It seems likely that we are facing multiple wicked problems, where there are no definitive formulations and no right-or-wrong solutions, but every attempt counts! In such circumstances how we describe our social, political and economic challenges influences the solutions we try, so getting a variety of viewpoints might be the most important role played by this year’s Forum.

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Posted in Change, General | Tagged Anglo-Saxon capitalism, Bretton Woods, bubbles, Carlota Perez, change, deployment, ecological perspective, financial capital, gilded age, Global Peter Drucker Forum 2014, golden age, Great Recession, inflection point, installation, probe-sense-respond, productive capital, Schumpeter, techno-economic paradigm, technological revolution, turning point | Comments Off on The Great Transformation – Getting a Handle on Wicked Problems at the 2014 Global Drucker Forum

The Spring Campaign

Last Sunday we put our clocks forward in Canada to reflect the return of the sun to the Northern Hemisphere and the possibility that winter might come to an end and give way to spring. It cannot come soon enough; it’s been a brutal winter by any measure. As of last week the ice in Toronto Harbour was up to 60 cm thick. The two city icebreakers had worked 80 days straight to keep the lanes open for the ferries that ply between the mainland and the islands a distance of two kilometres. All the Great Lakes are frozen over except for Ontario, which is much deeper than Erie and is further south than Huron, Michigan and Superior.

I am gearing up for my spring management education campaign. On March 21^st I will be teaching a one-day course on the fundamentals of finance for decision-making as part of the executive education program for the De Groote Business School at McMaster University. In the past this course has been taught in lecture format with perhaps a short case thrown in. I will be using the Apples & Oranges simulation from Celemi to teach it. I have used Apples & Oranges for many years and it is one of the finest learning experiences that I know of. I have had graduates with MBAs come to me after the simulation and tell me that they learned more about accounting and finance in a few hours than they had in their semester-long courses at business school! Celemi have continued to update and improve the simulation and I am looking forward to using it in its latest version.

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Posted in Change, General | Tagged Apples & Oranges, Celemi, Center for Creative Leadership, Conference Board, De Groote, Enterprise Risk Management, finance, ice, Kamloops, Leadership Metaphor Explorer, Rotary, San Diego, spring, Thompson Rivers University, United Jewish Appeal, Visual Explorer, winter | Comments Off on The Spring Campaign

BOOM! – The Perils of Big-Bang Rollouts

Late last year Target, the Minneapolis-based American discount retail chain, suffered a massive data security breach. Just before the busy Christmas season hackers broke into the corporation’s computer systems and stole information from over 100 million of its credit and debt card users. Fraudulent transactions using that data began almost immediately. It was a public relations disaster for Target, as its holiday sales fell 3-4% over those of the previous year and it was faced with the problem of repairing its security systems and replacing the customers’ cards. But there was a silver lining to this dark cloud: at least the big chain did not have to talk about the disastrous rollout of its Canadian venture, where it is expected to lose $800-$900 million in 2013. It had expected to break even!

Target announced its intention to enter the Canadian market – its first international expansion – in early 2011. It bought the leaseholds of 220 stores of the Canadian retailer, Zellers, which was a low-end discounter that had fallen on hard times. Zellers was founded during the Great Depression, when it had flourished via alliances with the American variety store, W.T. Grant (Grant went bankrupt in 1976) before being acquired by the Hudson’s Bay Company in 1978. Zellers took over the K-Mart operations in Canada but even together they were unable to compete effectively with Wal-mart and other big box retailers. The upshot of the deal was that, instead of being able to do an incremental store-by-store advance into Canada, Target was faced with executing a large-scale “big-bang” rollout in facilities that did not necessarily fit its size and location requirements and in a country where it could not rely on its American supply chain to handle the logistics.

The consequences of this, which even a casual shopper in the stores could see, were catastrophic. Much of the attractive merchandise found in the US stores never made it across the border due to licensing and labeling problems. In Canada there were miles of empty shelves and the prices of the goods on them seemed much higher than those in the US. As a result the Canadian Target stores seem empty and cheerless. Some shoppers say they preferred the old Zellers! Continue reading →

Posted in Change, Leadership, Strategy | Tagged big bang, change, ecological perspective, hacking, HMO, Hudson's Bay, Learning from the Links, Lowe's, Obamacare, Oxford Health Plans, positive deviance, RONA, security breach, Stephen Wiggins, systems, Target, W.T. Grant, Zellers | 1 Comment

Sweet But Dangerous: The Challenge of Institutional Change

There was a very interesting story in the Sunday Telegraph a couple of weeks ago about John Yudkin (1910-1995), a British physiologist and nutritionist who did pioneering work on the connection between the consumption of sugar and all manner of health problems. In 1972 he wrote a book Pure, White and Deadly that outlined the link between excessive sugar consumption and heart disease and hinted at its connection to obesity, diabetes and liver disease as well as possible relationships with some kinds of cancer.

Not only was this message extremely unwelcome to the sugar industry and manufacturers of processed foods, but it went against the conventional wisdom of the times that saturated fats were the problem. The fat story had been a boon to sugar industry because food processors had responded to public concern about health by producing low-fat versions of their products and using vast amounts of sugar to conceal the fact that without fat they tasted awful. Thus what followed Yudkin’s book is a classic illustration of the challenge of institutional change. Like the tobacco industry and the makers of leaded gasoline, to name just two examples, the sugar industry and those who used sugar as a major ingredient of their products, had insinuated themselves into the fabric of the communities they depended upon. Sugar manufacturers sat on national nutrition councils and pop producers sponsored conferences. They set out to discredit Yudkin and his work in ruthless, unscrupulous ways. He found himself disinvited from conferences and vilified by fellow scientists employed to discredit his work, which was dismissed as “emotional assertions” and “science fiction”.

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Posted in Change, Leadership, Strategy | Tagged Alfred Wegener, conscious capitalism, continental drift, fructose, institutional change, John Yudkin, paleomagnetism, sugar, Whole Foods | 2 Comments ← Older posts Newer posts →