Five Overlooked Principles Shaping the Destiny of Your Business

Until you grasp Turing’s theory of computability, Coase theorem of transaction costs, Bell’s law of computer classes, Baldwin and Clarke’s concept of modularity, and Nakamoto’s law of the distributed ledger, you’re not prepared to lead a digital company.

 

by John Sviokla

https://www.strategy-business.com/article/Five-Overlooked-Principles-Shaping-the-Destiny-of-Your-Business?gko=c5d7a&utm_source=itw&utm_medium=20170419&utm_campaign=resp

On the surface, this may seem highly technical but take the approach of extracting the insights on the possible but potentially profound impact on your businesses.

The most important changes are often the least obvious. That’s especially true in business, where changes are taking place on a greater scale than ever before. The advent of digital technology has brought a number of these dynamics to the forefront. They can be thought of as principles. Like Moore’s law or Murphy’s law, they explain the way the world works.

If you’re in business in the 2010s, an understanding of these five principles is crucial, because digital disruption is quickly becoming the new normal. Many growth strategies that may have worked well in the past no longer pack a punch. The principles help explain not just what will happen to your company next, but why.

Turing’s theory of computability: Machines can calculate any of the ever-growing number of problems that are possible to calculate… He identified what he called “computable” activities: any task that a theoretical machine (in this case, a mathematical model with a process similar to a computer) can address. Having determined that computability can be identified mathematically, Turing then postulated that machines have the capacity to perform computable tasks as well as human beings can….

…. It would be hard to exaggerate the significance of Turing’s work on computability and artificial intelligence. It launched the computer age, establishing the fact that everything digital, from the first computer to the cell phones that are ubiquitous today, has the potential to overtake work currently done by people. When highly valued digital technologies emerge, such as search engines, ride-hailing apps, automated teller machines, travel-booking websites, and many others, they inevitably displace human effort — and in the process, they fundamentally change their industries.

The impact of increasing computability explains why established companies are so strongly affected by digitization. In a world where anything businesses do might soon be done by a computer, they have to continually redefine themselves along digital lines — whether it’s Walmart acquiring Internet retailer Jet, GE making its industrial products “smart,” or John Deere developing robotic lawn mowers. Among the tasks expected to become computable before long are basic due diligence in M&A transactions, real-time language-to-language translation (such as English to Chinese), some forms of programming, and most of the world’s motor vehicle driving.

Coase theorem of transaction costs: Aside from transaction costs, the most efficient outcome will prevail in any market. The critical phrase in this theorem is aside from transaction costs. The theorem means that the investment of money, time, and attention devoted to the exchange of goods and services will determine how well your company competes. Or, put another way, the only companies with growth potential are those that keep their internal transaction costs (their own expenses) lower than their external transaction costs (the expense of doing business with others)…

….. A company can grow only as long as its internal costs, including all overhead, are lower than its external costs. Once internal costs equal or surpass external costs and the company has reached the point of diminishing returns, it will stop expanding. Because internal transaction costs are often difficult to spot, the leaders of the company may not realize why it’s struggling…

… As digitization continues, transaction costs will continue to decline. This will affect decisions about which activities to keep inside an organization and which to acquire from the outside. Some things that used to be cheaper on the inside will now become more expensive — for example, the maintenance of R&D staffs. Hence the value of open innovation. Meanwhile, things that used to benefit from outsourcing, such as HR and training, may now become less expensive internally, because the de-layering of hierarchies may allow more informal (and therefore less expensive) talent management and recruiting. The only thing that won’t change is the basic equation: The lower your internal costs compared with your external costs, the more likely your company is to grow.

Bell’s law on the birth and death of computer classes: Roughly every decade, a new class of lower-priced computing devices emerges — and changes everything…..

…. When highly valued digital technologies emerge, they inevitably displace human effort — and fundamentally change their industries.

Every time a shift in computer classes takes place, the impact goes far beyond technology. New platforms, new forms of programming, and new types of network interfaces appear. In business, a distinct new industry emerges, often with completely different companies in the lead. The old companies either adapt (as Apple did with the smartphone and Microsoft did with the cloud) or decline (like Digital Equipment Corporation, Gateway, Kaypro, Osborne, and many others).

Baldwin and Clark’s concept of modularity: Breaking a technology or process into functionally relevant components facilitates innovation…. It breaks a complex technological project into a number of functionally relevant components — standardized where standardization is called for, and individually designed where differentiation is needed.

In a system with high modularity, the standardized parts, or modules, can easily be swapped out, upgraded, and adapted in different ways for different systems. Modularity makes it easier (and less expensive) to manage the complexity of a design…. A truly modular system can be tailored to individual customers without the entire design needing to be reinvented.

Nakamoto’s law of the distributed ledger (discussed the concept of Blockchain in our March 6 posting): Transactions improve when trust is managed by the system, not by mediators:… the Internet commerce of that time relied on financial institutions as a trusted third party to process electronic payments. This was unnecessarily complex and was vulnerable to deceit or failure. He posited that if two parties could electronically transact with one another without the need for an external overseer, online transactions would be easier and cheaper.

A few months later, Nakamoto released the first version of bitcoin: a digital currency with a distributed ledger, a peer-to-peer data technology that ensures verification through a software process called blockchain. Blockchain uses a digital distributed ledger to record transactions electronically, linking each new entry by code to the entry that came before. Verification takes place through network coordination. Computers all through the network contribute to bitcoin’s computation, storing the ledger and exchanging the codes that create new bitcoins. This distributed approach ensures that all the posted transactions are legitimate. No single member or group can compromise the integrity of a ledger distributed among so many participants.

The Power of the Five Principles

Taken together, these five principles have enormous economic ramifications. Although it’s impossible to predict the full extent of their impact, it’s clear they will change the structure and source of profit in a variety of industries around the world. Already, the shifts in computability, computer classes, transaction-cost dynamics, and modularity have enabled companies such as Amazon and Google to reach untold numbers of vendors and customers without racking up crushing operating expenses.

These principles also help us better understand the ways in which winning companies compete in today’s rapidly digitizing market. At the end of the day, great strategy depends on understanding the fundamentals of innovation, economics, and marketing, which are changing in terms of value creation. Power will flow to enterprises that embrace automation, reduce internal costs, make better use of advanced devices, design modularity into their products and services, and participate in blockchain-style verification systems. To be sure, the optimal approach will vary from one industry to another: A human third party may be enough to guarantee the security of transactions in some markets, whereas other markets will require virtual third-party validation through a blockchain system.

Bill Belichick reveals his 5 rules of exceptional leadership

https://www.cnbc.com/amp/2017/04/13/bill-belichick-leadership-rules.html

Bill Belichick is perhaps the most successful coach in any professional sport. I believe these are some very powerful insights

1. Leadership means building a team that's exhaustively prepared, but able to adjust in an instant
"The only sign we have in the locker room is from 'The Art of War.' 'Every battle is won before it is fought,'" says Belichick, who started breaking down films of opposing teams when he was 7 years old and hanging out with his dad, Steve, an assistant coach at Annapolis.

"You [have to] know what the opponents can do, what their strengths and weaknesses are ... [and] what to do in every situation," he says.

That ability — to adapt on a dime — is why Belichick says he spends so much time building teamwork, from having the team train with Navy SEALs, to organizing trivia nights, where, incidentally, all social media is banned.
"Nobody is against [social media] more than I am. I can't stand it," Belichick says. "I think it's important for us, as a team, to know each other. Know our teammates and our coaches. To interact with them is more important than to be 'liked' by whoever on Chatrun." (In the same conversation, he also derided "InstaFace" in all seriousness.)

2. Leadership means having the discipline to deploy your "dependables"

You know your star performers? The ones who can dazzle and amaze, except when they don't? They're definitely appealing, Belichick admits.

But over the years, he's learned they're not his type. He'd rather stick with his tried-and-true people — call them his "dependables."

"There have been times when I've put too much responsibility on people. ... They might have been the most talented, or the people you hoped would do the right or best thing, and they didn't come through," Belichick says.

Big mistake.

When it comes to getting things done, especially critical things, forget the high flyers: "You have to go with the person who you have the most confidence in, the most consistent," Belichick says. "And if it doesn't work, it doesn't work, but I'm going down with that person.

3. Leadership means being the boss

Belichick says this principle first came to him when he was just 23, addressing the Colts (another American football team) as a special teams coach. Two players, one of them a talented starter, spent the beginning of the meeting giggling and chatting. Inside, Belichick recalls, he was seething: "I'm not afraid of these guys. It's either [them] or me. We can't run a team like this."

Finally, he let loose. "Look, either you shut up or you get out of here. That's it."

It worked.

And it was an aha moment that has guided him since. "I don't care if they're a star player," he says. "I don't care who they are. You have to set the tone.

4. Leadership means caring about everything going on in the lives of your people

Maybe the previous rule would make you think otherwise, but Belichick strongly believes you must see your team not just as players, per se, but as people who have full, three-dimensional, and often messy lives.

"There are a lot of things that affect what happens on the field that occur off the field," he says. Players "have wives and girlfriends. And they have babies. And they have personal situations. They have parents that are sick. All of it runs in together."

Work and life, in other words, are inseparable, and it's incumbent on leaders to help their people sort through it. "The more you and the organization can help take care of personal situations," he says, "the smoother the ship runs on the football end."

5. Leadership means never resting on your laurels

Ask Belichick if he's still celebrating the stunning come-from-behind Super Bowl victory in February and you get another "You're killing me here" look.

"We're onto 2017. No one cares about 2016 anymore," he says. "You can't look back. We don't talk about last year. We don't talk about next week. We talk about today, and we talk about the next game. That's all we can really control."

In other words, it's OK to celebrate a big win — but get it over with fast.Oh, come on, not even a little parading the championship rings around the house? Belichick pauses — and smiles. (Yes, he smiles.)

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Mastering Complexity Through Simplification: Four Steps to Creating Competitive Advantage

February 16, 2017 by Jaap Backx, Christoph Hilberath, Reinhard Messenböck, Yves Morieux, and Henning Streubel

It is very important to read the full article to appreciate the richness of this approach

Businesses compete in a world that is growing ever more complex. Disruptive technologies emerge with increasing frequency. Customers’ needs and demands change at breakneck speed. New competitors are always entering the fray.

In their attempts to reduce uncertainty and reestablish control amid this new complexity, companies tend to introduce new reports, new rules, and new processes. Such reactions, however, simply translate external complexity into internal “complicatedness”—the counterproductive proliferation of cumbersome structures, processes, and systems. Complicatedness hinders productivity by creating a work environment that leaves employees disengaged and unmotivated. To be successful in today’s complex and fast-changing world, companies must be highly agile and flexible—able to identify opportunities and make informed decisions quickly in order to exploit those opportunities. Those companies that are able to hone that agility in the face of increasing external complexity will emerge with a clear competitive advantage.

Smart Start. The first step is the identification of the performance issues and the symptoms of complicatedness. A company should not simplify itself only for the sake of simplifying. Simplification is for companies that aim to tackle concrete performance gaps currently caused by complicatedness. The performance issues need to be measurable, and the benefit of addressing the problems should be clear, quantifiable, and worth the energy expended.

In this step, performance concerns—for example, a slow pace of innovation and the loss of market share—are linked to obvious symptoms of complicatedness. This step typically includes a “complicatedness assessment,” which examines the eight context dimensions to identify the symptoms and level of complicatedness, as well as bench marking against other organizations to establish a baseline of the system at work in the company. In the end, senior managers must reach agreement on the answer to the key question: What are the issues or problems caused by complicatedness that we need to solve?

Diagnosis. This step focuses on achieving a clear understanding of what is causing the performance issues, through in-depth analysis of behavior (what people are doing today) and the context (why they do what they do). The goal is to determine precisely the root causes of complicatedness.

This is generally achieved by defining five to ten use cases, for example, the procurement process that illustrates poor alignment among finance, engineering, and manufacturing. Each use case needs to be clearly linked to a specific problem area or process. Taken together, the use cases should encompass most of the identified performance gaps. In discovering what drives the behaviors of individuals in particular roles in these use cases, we get a good sense of the context changes required.

An analysis of behaviors is done through socio-organizational interviews with the key stakeholders. Furthermore, a context diagnostic is conducted in order to understand the link between context and behavior. These two analyses should provide a rock-solid understanding of the root causes of the performance issues. That insight will establish a concrete rationale for the identified interventions—changes designed specifically to adjust the context in order to remedy the performance issues.

Solution Design. This step focuses on changing the context to make desired behaviors rational. The central question at this point is, What targeted interventions will address the root causes of the performance issues and thereby eliminate complicatedness? This determination is based on the necessary context adjustments that are identified through analysis of the five to ten use cases and the understanding of the required target behavior for each use case. Since interventions are designed for concrete use cases, they are very specific. For example, one adjustment may be to change the performance review process to make behavior X logical for employee Y in a specific situation. Such targeted adjustments have greater and longer-lasting impact than changes made on the basis of industry best practices.

Implementation. The fourth step focuses on implementing the solutions and ensuring that they are sustainable and can be improved continually over time. This involves prioritizing solutions and creating an implementation road map. An activist project management office (PMO) with clear authority to drive the process, challenge proposed solutions, and make decisions on trade offs is a key factor in this phase. To lead its simplification drive, the global machining company described above created such a PMO.

The enablement of company leaders—essentially educating them and giving them the tools for thinking and acting with a Smart Simplicity mindset—is a critical aspect of lasting change. This ensures that the organization will cope with challenges and uncertainty with intelligence and insight. Successful implementation yields improvements in performance, productivity, and employee engagement.