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Q&A with Stephan Haeckel October 26, 1999 On the Net, "Planning Goes out the Window" IBM's Stephan Haeckel explains how the Internet is forcing fundamental changes in corporate culture The five-year plan is dead. So is the three-year plan -- and anything with "-year" in it. Some companies are having to write and rewrite strategy every quarter, or even every week. Unpredictable, discontinuous change "is an unavoidable consequence of doing business in the Information Age," says Stephan Haeckel, director of strategic studies at IBM's Advanced Business Institute and the author of the new book, Adaptive Enterprise. The acceleration is triggering enormous cultural changes inside companies, Haeckel says, and the successful ones will learn to be more responsive to what customers want. Business Week's Technology Strategies Editor Marcia Stepanek recently chatted about the changes with Haeckel. BW: What's the impact of Internet time on planning? Haeckel: Basically, the issue is this: What do you do when you can't plan anymore? Planning goes out the window when the only truth is unpredictability. The transformation to an e-business is the transformation to an adaptive organization. The Net is bringing transaction costs way down, and it's changing the world. We can now do things that we could never do before to increase customer value. Strategy now has to be driven by what customers want, not by what the executive board wants customers to want. BW: That creates enormous cultural changes inside companies. Haeckel: Here's what's going on: Technology and the Web are not only speeding things up and making things unpredictable but they're driving down transaction costs. All this white-water turbulence is fragmenting businesses into smaller and smaller quick-response units. So companies are doing away with the old central planning. But in the process, they are in danger of relinquishing important advantages of scale and scope. BW: Is it possible to have it both ways? Can large, complex companies adapt successfully and systematically to unexpected change? Haeckel: Yes, but only if managers of companies learn how to manage their organizations as adaptive systems -- to sense early and respond quickly to abrupt changes in individual customer needs. A firm's operations today must be driven by current customer requests, implicit as well as articulated -- and not by plans to make and sell what customers are forecasted to want in the future. As the economy becomes more information-intense, it becomes more possible and more necessary to change things faster because you can now represent more of the real world in symbols and change the world by changing symbols at electronic speeds. Predictability goes out the window at those speeds. So strategy must become adaptive, to respond to current requests of current customers. It can no longer be a way of planning things in advance. BW: It all sounds massively difficult. How do you change the corporate DNA so profoundly? Where do you begin? Haeckel: A shift from make-and-sell to sense-and-respond is enormously difficult, but companies have no choice because information technology is requiring this type of transformation by companies. It's a true transformation because it involves changing a firm's basic function from making offers to responding to requests, and also changing its structure from that of an efficient machine to that of an adaptive social system. But the first step toward a company that engages in mass customization is, of course, to understand that unpredictability is the No. 1 issue facing the organization. Then each organization can figure out its capability to obtain, track, analyze, and compare increasing amounts of information about their customers. As companies get better at understanding the potential costs and benefits of individual customer relationships, they will become more interested in responding to the needs of high-value customers rather than following traditional make-and-sell strategies aimed at broad, if-we-build-them-they-will-come markets. BW: Can change get much faster? Haeckel: I think this is just the beginning. Think about how ridiculously low transaction prices really are. The cost of bank transactions is 1/100th less on the Net than in the branch office. And that's precisely what's happening. It's because the marginal cost of producing things and distributing them is falling to zero. That's just economically unprecedented. It's a rush of unprecedented speed, and as more companies and participants hop onto the bandwagon, the speed of change will continue to accelerate. BW: What typically slows down a company's ability to adapt? Haeckel: I'd have to say that above anything else, it's denial of the changes and the pace of the changes. Of the 3,000 industry, government, and education executives that have gone through the IBM Advanced Business Institute since 1996, some 70% have said that change will be unpredictable and discontinuous in the future. Some 52% of the total also say it's no use predicting the future. But when you ask them what they are doing about all this uncertainty, they say build and sell better. Or they're in denial about change, because all they really know how to do is build and sell. Clearly, they need to sense and respond, and come to terms with what this whole new ball game means from a strategy point of view. This can be terrifying for managers, and be equally terrifying for employees, because they now have to be held accountable for the consequences of their actions. BW: What other challenges are there culturally? Haeckel: There's a deeply embedded DNA that exists in the way we keep score at organizations. The ways that we measure things -- progress, success -- all must change, too, because of the Net. The accounting systems, pricing models, response models -- in short, many of the ways we determine how things are doing out there -- are all changing. How we respond to these changes is still, for the most part, also based on old economic models, not on the information economic models. Capital goods, for example, have maximum value before they're used, but information assets have no value until they are used. So why spend a lot of money to learn about the customer before you know what the information is going to tell you about the value there is inside these organizations? For example, the old way says you make prices by assuming the depreciation of assets that, in fact, don't depreciate. Most firms haven't even tried to measure -- or put on their balance sheets -- the value of their information assets, so it's systematically ignored in business cases. Another cultural change that I think is perhaps the most difficult is that authentic communication is absolutely critical. Most of us grew up in an organization where people systematically defeat authenticity and reward such games as asking for more than you need, offering less than you know you can give, and making certain that some things are not discussed. In a Net environment, one of the major issues is how do we manage risk and deal with uncertainties. There can't be unauthentic information in that kind of fast and down-to-the-wire environment, so authentic communication is now essential. We have a lot to learn and unlearn about communicating with each other. BW: In some companies, too, the budget cycle isn't moving as fast as strategy. Haeckel: Yes. It's extremely difficult for companies that exist already to change from a caterpillar to a butterfly while keeping the caterpillar moving along in accordance with the same old budget and financial plan. In companies I've worked with, there have been one or two reasons for this: Either there has been a crisis that leads people to understand that they must do something fundamental and systemically different, or there's what I'll call a Lorenzo. There's some senior executive with clout and influence who has the intuitive conviction that change must happen, and allows and supports a group within the organization to try it and kind of protect them while they try it. I refer to Lorenzo Domenici, who played a patron role with Michelangelo. There are organizational units that are independent enough that it's possible to put these changes in place without destroying the fabric of the existing organization and to begin learning what it means to operate this way and what are the challenges that we have to learn and what is good practice and what is practical? BW: Who's doing this sensing and responding well? Haeckel: Well, I like Progressive Insurance. They have an enormous amount of information, and they're talking about how they can price their auto insurance to you to make higher-than-industry-average profits and save you money on the premiums at the same time. They have 14,000 different combinations of risks and contingencies that make 14,000 different policy combinations. They also use signals from Global Positioning devices placed in cars that they insure. If, say, a car accident of over 15 mph has occurred, that alerts the dispatching function at Progressive, and they send the closest person in a van to the scene of an accident. These people dispatch emergency help if they need it to console folks and also take photographs of the car. And based on what they do and learn on the scene, they're able to -- in many cases -- settle claims on the spot, or within a very short period thereafter, which not only reduces litigation and fraud but also responds much more completely to a customer's current needs. BW: Clients? Constituents? Don't you mean customers? Haeckel: Yes. There are enormous amounts of discussion about who is the customer. Every organization has a multiplicity of constituents, each of which has a claim on the organization. The leadership must decide who is the primary constituency and what do we owe them? If that primary constituent is the shareholder, do you owe them an increase in market cap or profits? Or if that primary constituent is the end-customer, then do you owe an increase in value? Or if that primary constituent is the employee, is that an increase in well-being and morale? Each of these constituencies must be met. But you have to design a system to deliver what you owe. And that requires learning about how to think about the organization as a system, and designing it and managing it that way. BW: O.K., so who does this well? Haeckel: I know of no large organization that manages itself -- yet -- as a system. None. They're mostly framing themselves by geography, product, line of business -- and they are trying to deal with some of these interactions by matrix management, traditional chains of command. But the traditional way is organized by lines of authority rather than lines of functionable outputs. In other words, companies and managers must learn fundamentally new competency: designing and leading organizations as systems rather than as collections of products and functions. The fundamental need in e-business is to redesign organizations. Now many traditional firms see themselves as a collection of parts or processes or products or geographies or industries or corporate projects. But they must design themselves to become more adaptive. You don't plan. You plan, instead, to achieve an adaptive organization, and your strategy is your strategy for the moment. The dispatcher wants strategy put together for the moment. It's what the customer wants now, and here's how I'm going to dispatch organizational capabilities this time. Tomorrow, the same customer calls with a different need, and we have a different strategy for that customer. We allocate our resources differently to produce a different outcome. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS IBM's Advanced Business Institute Progressive Insurance BW e.biz Nov. 1, 1999: "How Fast Is Net Fast?" Jeffrey Wilke: Guiding Amazon's Foray into Bricks and Mortar Gomez Advisors: Scorecards on Internet Storefronts