THE ZERO-TRAUMA COMPANY

by Dr. Robert N. Charette, Director, Risk Management Intelligence Network

"It is not necessary to change. Survival is not mandatory." This is one of my favorite quotes by W. Edwards Deming. It gets unswervingly to the point about the need for organizations to adapt to changing circumstances, and it lays out the consequences if they don't. In a very interesting article in the September 2003 Harvard Business Review called "The Quest for Resilience," Gary Hamel and Liisa Valikangas give new meaning to Deming's idea.

In their article, Hamel and Valikangas describe a turbulent business world that is becoming increasingly chaotic faster than ever before. The authors cite as examples the fact that of the largest 20 bankruptcies in the past 20 years, 10 have occurred in just the last two years. They note that over the past 40 years, year-by-year earnings growth volatility has increased by 50%. They further note that almost 20% of Fortune 500 companies saw net income decline during the years 1993-1997, in the midst of the longest economic expansion of the modern financial era. The business world now resembles a place where the late biologist Steven Gould's evolutionary theory of punctuated equilibrium rules, with the periods of equilibrium becoming increasingly shorter in length.

What Hamel and Valikangas see from the economic data is a world that is changing faster than companies are able to adapt. This situation has produced, in their opinion, a "resilience gap." This gap can be defined as the difference between what the current competitive situation calls for and a company's ability to continuously reconstruct its core competencies and business models in order to operate successfully in this changing competitive landscape. Take American Airlines, for instance. The world's largest airline totters on the brink of bankruptcy, as airlines like Southwest and JetBlue thrive. These companies are succeeding because they create new business approaches and constantly adapt them to meet their customers' needs. What once were American's strengths -- its size and reach -- which it built up over a period of relative market equilibrium, are now major weaknesses when operating in a very volatile marketplace.

Hamel and Valikangas contend that companies cannot survive on the assumption that their current business models are, in the authors' words, "immortal." Instead, companies must now develop as their fundamental competency the capacity to dynamically reinvent their business models and strategies as circumstances dictate. This is no small task. To begin doing so, Hamel and Valikangas stress that companies must aspire to become what the authors call "zero-trauma" organizations; ones "with no calamitous surprises, no convulsive reorganizations and no colossal write-offs" in their future. The concept of zero trauma is derived from the idea of achieving zero defects. Just as defective parts cost a company wasted time, effort, and money, so do defective corporate strategies.

The authors move on to assert that there are four areas on which companies need to focus if they want to become zero-trauma organizations. The first is the area of increased realism, or "conquering denial." Senior executives must quit seeing their corporate strategies as anything other than temporary. Too often, executives view failing strategies as the result of poor execution, rather than the strategies no longer being feasible. By the time the real reason for the failed strategy is discovered, it is too late.

Second, companies must "value variety." The competitive landscape is changing too rapidly to make accurate predictions about the future. In such an environment, a company needs to create hundreds of new strategic options with the aim of quickly testing out the most promising of them. This means creating a large number of trial products and services to see what works and what doesn't, and then being able to create and market them swiftly. This in turn means moving away from taking a few big risks on a small set of products or services to taking a lot of small risks on a larger potential set of products and services. It also means being able to move rapidly to kill products or services that aren't working out.

Third, companies must figure out how to "liberate resources." A company's future is to be found in creating a wide variety of products and services. However, because there are so many internal vested interests in creating new products and services, it is unlikely that a company can create the requisite variety unless it can find new ways of investing internal capital. R&D in most organizations is too often tied to slowly changing, long-term strategy initiatives rather than to strategies that rapidly adapt and have short half-lives. Hamel and Valikangas suggest that creating internal capital markets -- almost like venture capital markets, where those with control of budgets could invest 3%-5% of their resources in new and innovative strategic initiatives (and reap some of the rewards if a new initiative succeeds) -- could be a way to overcome the inertia and delay normally found in funding promising projects.

Finally, Hamel and Valikangas contend that zero-trauma companies must learn to "embrace paradox." A company must learn how to be both cost-effective and innovative simultaneously. Or as English mathematician and philosopher Alfred North Whitehead once put it, "The art of progress is to preserve order amid change and to preserve change amid order." Companies have strived over the past 100 years to be cheaper, faster, and better -- that is, to optimize their operations. But with change occurring so swiftly, the desire for optimization must be weighed against the need to adapt continuously. This creates a new imperative -- one in which a company must learn to maximize its resources. Optimization assumes a business model that changes little -- maximization assumes that the business model will always be changing.

To achieve a zero-trauma organization such as Hamel and Valikangas envision will require placing even greater emphasis on managing risks correctly. A culture of risk leadership will need to be created in which superior situational awareness, decisionmaking, and knowledge all abound throughout the organization, allowing opportunities and profits to be discovered and exploited among the waves of marketplace turbulence.

-- Dr. Robert N. Charette, Director, Risk Management Intelligence Network