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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 In Part 2 of an excerpt from It's Alive, change is increasingly the only business constant, so "adaptive management" is crucial It's Alive: The Coming Convergence of Information, Biology, and Business by Christopher Meyer and Stan Davis Chapter 1: Learning from Life Cycles Permanent Volatility An analysis of the history of technology shows that technological change is exponential, contrary to the common sense, "intuitive linear" view. So we won't experience 100 years of progress in the twenty-first century -- it will be more like 20,000 years of progress (at today's rate).Place an order online, and your confirmation appears in your inbox before you go online. Try to have your Walkman repaired, and you find that it's been replaced by a newer model. And the expectation of today's customers is that any feature they've seen anywhere should be available everywhere instantly. Formulate a business strategy or a new product-development cycle, and your plans are superseded by events before you can implement. The time between internal management changes and external responses is shorter and shorter. And the degree of unexpected disruption is greater. As we said earlier, it's not just your perception -- the rate of change is genuinely accelerating, the world is genuinely less predictable, and the swings in demand, mood, and prevailing wisdom are genuinely more volatile. And it's not just recession, the dot-com bubble, the aftershocks of 9/11, or the spate of corporate scandals. Change has become more rapid and volatility permanent. If you doubt it, consider the following indicators: Accelerated Change • The number of Fortune 300 CEOs with six years' tenure in that role has decreased from 57 percent in 1980 to 38 percent in 2001. • In 1991, the number of new household, health, beauty, food, and beverage products totaled 15,400. In 2001, that number had more than doubled to a record 32,025. • From 1972 to 1987, the U.S. government deleted 50 industries from its standard industrial classification. From 1987 to 1997, it deleted 500. At the same time, the government added or redefined 200 industries from 1972 to 1987, and almost 1,000 from 1987 to 1997. • In 1978, about 10,000 firms were failing annually, and this number had been stable since 1950. By 1986, 60,000 firms were failing annually, and by 1998 that number had risen to roughly 73,000. Increased Volatility • From 1950 to 2000, variability in S&P 500 stock prices increased more than tenfold. Through the decades of the 1950s, 1960s, and 1970s, days on which the market fluctuated by three percent or more were rare -- it happened less than twice a year. For the past two years it happened almost twice a month (Figure 1-3). • The number of firms that take "special items" in their accounting has grown dramatically. The number of S&P 500 firms declaring "special losses" has grown from 68 in 1982 to 233 in 2000. Special items are, by definition, an admission of being caught flat-footed by change more volatile than the normal course of the business cycle.  We need to stress that our argument here contains two distinct points. The first is that change has accelerated. That means whatever trend you look at will be proceeding more rapidly. Volatility is the degree of variability around a given trend. Our second point is that volatile events are of greater magnitude and occur more frequently. These reinforce each other, but they're not the same thing. Connectivity and the Change in Change What could cause a permanent increase in volatility and the rate of change? While no single answer provides the whole explanation, one clear cause is connectivity. Without belaboring the well-known point, connectivity has transformed our world: • In the six years starting in 1996, the percentage of the U.S. population online grew from 14 percent to almost 52 percent. • The maximum speed of connection in 1940 was about 1,000 bits per second; by 2000, it had reached 10 trillion bps. • The number of Internet hosts -- important as a measure of the information a person can connect to -- rose from several hundred in 1981 to about 100 million in 2001, while the cost of ISP service fell by a factor of 10 million. • The cost of a three-minute phone call between New York and London fell from $300 in 1930, to $60 in 1960, to about $1 today (in constant dollars). • In 2002, the number of mobile phones worldwide reached one billion. These leaps in the mobility of information make it possible to disseminate new ideas more quickly and cheaply than ever before. When information is codified and information technology modularized, upgrades, add-ons, plug-ins, and innovation can all happen quickly. The ease of adopting (or copying) software drives the pace of change, as does the ease of global communication, which enables rapid learning and transfer of know-how.
Connectivity between ideas creates the next new product, and connectivity of companies creates the next merger and change in industry structure. Connectivity between buyers, sellers, supply chains, and financial institutions shortens both the marketing cycle ("awareness, interest, purchase" is as fast as "see the ad, go to the website, research it on the Web, and order online"), and the order-to-cash cycle. Connectivity is clearly a root cause of the acceleration of change, but in a more subtle way, connectivity must also be held accountable for increased volatility. Greater connectivity in information systems increases both the speed of communications and the permeability of boundaries that were once much more dificult to breach. This means that a signal created in any market, society, or system can propagate faster and travel farther than ever before, meaning that the climate in Brazil affects the price of coffee on the shelves more quickly and in more parts of the world. And though in a given network we can take steps to reduce the swings, we can never know when some newly made connection will create an unanticipated instability.
BW MALL
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