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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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MAY 25, 2004
All Volatility, All the Time [Page 3 of 3] Every time something changes in a business environment -- a new technology, a new market expectation, or a new competitor -- there's an opportunity to make a change in the business. As AT&T found out, however, if the fixed costs are supporting an equally fixed infrastructure, change doesn't happen. Compare this with the speed of change at Amazon.com, which seems to introduce a new interface, program, or feature every week. Amazon, bred in the fast-changing environment of the Net, was built to respond rapidly to environmental volatility. AT&T, reared in an environment of regulatory oversight and forty-year depreciation schedules, was not. AT&T adapted beautifully to the environment created by the Communication Act of 1934. Every enterprise either adapts to its environment, or dies. As the environment changes more rapidly, the costs of adapting become an ever-larger part of the total. The costs of never-ending product development as at Netscape or Microsoft, of parallel development teams as at Intel, and of "special" projects at every business are a mounting proportion of the costs of doing business.
IBM is spending extra money on the plant itself, and thus raising the unit cost of each chip it will produce, in order to have a better chance of being faster to market. Given a strategy of technological leadership, as well as the volatility of the chip business, the benefit in time of being close to the company's labs in Westchester County is worth paying for. There's a second level to this story, and it's about flexible, adaptive manufacturing. If IBM has miscalculated the demand, it will suffer badly. High operating costs and depreciation on a huge capital investment will drag down earnings. But industry analysts say that the plant is likely to be insulated from a fall-off in one or a few segments of the semiconductor market. It is highly automated and designed to shift flexibly to produce many different kinds of chips to suit demand. "The diversity is the big difference with this plant," said Richard Doherty, director of The Envisioneering Group, a technology-assessment and research company. IBM has devised a solution to the impossibility of forecasting demand. The new approach is to stop guessing about the future, and to build so as to adapt to it by creating a diverse set of capabilities. The intent is to deal with a volatile market, protect IBM from flux in demand, and build an adaptive factory, one that can manufacture a diverse portfolio of chips for everything from mainframes to cell phones to video game consoles. The previous generation of manufacturing stressed the "focused factory," designed to minimize unit cost by doing just one thing superbly. Presumably forever. CEMEX, the world's third-largest cement company, faced a different adaptive imperative: intractable volatility. Fresh cement has a shelf life even shorter than that of fresh fish. Once the mixture is turning in the truck, the driver has only a couple of hours to deliver the load. Now imagine making an appointment to deliver cement to a construction site in Mexico City. The job may be behind schedule; traffic tie-ups may intervene; workers may not be available to receive the shipment. In response to the risks of spoilage, cement makers in Mexico once charged their customers high fees to reserve a time for delivery, and even higher penalties if they were unable to take delivery as scheduled. The relationship between suppliers and customers was adversarial, costs were high, and service was poor. CEMEX developed an adaptive solution: Treat the cement trucks like taxicabs. Station them in appropriate areas around the city, and have them respond to customers when summoned. Customers don't have to forecast, CEMEX doesn't have to commit extra resources, and the scheduling and late fees go away. CEMEX learned not to fight the volatility but, rather, to adapt to it. As a result, the company's guaranteed on-time delivery window has gone from the market-standard three hours to just twenty minutes, and it delivers loads within that window 98 percent of the time. IBM's new plant design and CEMEX's cruising cement trucks are two examples of what we call adaptive management. Information technologies (intelligent machines in IBM's case, radios in CEMEX's) support many such solutions throughout industry. Many business thinkers have noted this trend, including us in our 1998 book Blur. Here's the new wrinkle: As volatility and the cost of managing it become the new imperative, we need more than point solutions. We need a set of principles that support a comprehensive adaptive approach to management. We'll be developing this idea in Chapter 5, and analyzing Adaptive Enterprises in all of Part III. Yet before we're ready for that, we need to understand that the adaptive imperative is only one of two economic changes of the next ten years. Let's look at the second one. Part 3 of this excerpt discusses how researchers' deepening grasp of life's tiniest elements is shifting the economy's makeup From the book: IT'S ALIVE: The Coming Convergence of Information, Biology, and Business by Christopher Meyer & Stan Davis. Copyright (c) 2003 Cap Gemini Ernst & Young U.S., LLC. Published by Crown Business, a division of Random House, Inc.  Christopher Meyer is director of the Center for Business Innovation in Cambridge, Massachusetts. He is also a founder of Bios Group, Inc., a Santa Fe–based venture that develops applications of complexity theory for business.With more than twenty years experience in general management and economics consulting, he is an authority on the evolution of the information economy and its impact on business. He was listed among Consulting Magazine's "25 Most Influential Consultants" in 2001, and served on Time's Board of Technologists in 2002.With Stan Davis he was co-author of Future Wealth, published in 2000, and Blur, published in 1998.Stan Davis is a Senior Research Fellow at Cap Gemini Ernst & Young's Center for Business Innovation. His consulting has included senior executives at Apple, AT&T, Bank of America, Cap Gemini, Ernst & Young, Ford, JPMorgan Chase, KPMG, Marriott, Mercedes-Benz, Met Life and Sun Microsystems. Davis is advisor to the board of the Massachusetts Medical Society, which publishes the New England Journal of Medicine. Davis has shared his expertise in twelve books. His most recent book is Lessons from the Future. His 1998 Blur was a BusinessWeek bestseller, and his 2020 Vision was named the best management book of 1991 by Fortune.
BW MALL
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