The Demand Driven Adaptive Enterprise. Carol Ptak

care as they progress through admittance, a medical unit, a Definitive Observation Unit (DOU), and finally an Intensive Care Unit (ICU).

FIGURE 1-2 Alternate strategic target chart scenario

      Figure 1-2 depicts three different scenarios. In each case, the relative positions of each of the three considerations are plotted. It should be pointed out that all three of these scenarios are simply a point in time reference; it could be the same company just at different points in time or it could be three different companies at one point or even different points in time. The position and tension between these three important considerations is constantly shifting.

      Which scenario is healthier? The scenario on the left may represent a company that is performing relatively well with regard to contribution margin and the market but is suffering from a working capital crisis. The middle scenario depicts a company that is failing to generate cash and is suffering from a working capital crunch. The scenario on the right is a company that is generating a high amount of cash, has abundant working capital and a well-defended and growing base of customers.

      But how can leadership best hope to manage these basic elements in a VUCA environment? The key to both the short-term and long-term management of these elements can be found in concepts called “coherence” and “resiliency.”

Striving for Coherence and Resiliency

      Coherence and resiliency are key terms in the emerging science of complex adaptive systems. What is a complex adaptive system (CAS)? First, let’s understand that any complex system is governed by three important principles:

      

Nonlinearity. Complex systems are best described as web connections, not linear connections. They loop and feedback on themselves interactively. The degree of complexity resulting from dynamic interactions can reach an enormous level. Dynamic interactions are explained as high degrees of inter-dependencies, non-linear interactions, short-range interactions, and positive and negative feedback loops of interactions.

      

Extreme sensitivity to small initiating events. Lots of these initiating events occurring in a short time frame can produce significant nonlinear outcomes that may become extreme events. These events are often referred to as “lever point phenomena” or “butterfly events”.

      

Cause and effect are not proportional; a part that costs 10 cents can halt the assembly of multimillion dollar end items as quickly as a $10,000 part.⁶

      The word “adaptive” introduces the element of how a complex system changes or reconfigures itself through a process known as “emergence.” Once emergence has occurred, then feedback and selection occur over a period of time resulting in further reconfiguration to the system. When complex systems are co-mingled or intertwined (such as highly integrated supply chains) these events and steps tend to cascade across systems, making a highly complex and evolving picture. Figure 1-3 is a modified version of Figure 10.1 from the book Demand Driven Performance—Using Smart Metrics. It lists nine characteristics of a CAS.

FIGURE 1-3 Complex adaptive system characteristics⁷

      At this time we will focus on only two of these characteristics. The first is coherence. A complex adaptive system’s “success” depends on the coherence of all of its parts. A subsystem’s purpose has to be in alignment with the purpose of the greater system in order for there to be coherence. Without that alignment, the subsystem acts in a way that endangers the greater system it depends on. Coherence must be at the forefront of determining the signal set components, triggers, and action priorities. To maintain coherence, adaptive agents must ensure their signal sets contain the relevant information to direct their actions and are not at cross-purposes with the goals of the systems it depends on.⁸ The concept of coherence is consistent with the systemic approaches of thought leaders such as Ohno, Goldratt, and Deming and their respective disciplines of lean, Theory of Constraints, and Six Sigma. All of these disciplines urge management to organize and operate in a manner that emphasizes carefully aligning local actions to the global objective. Deming and Goldratt in particular were extremely opinionated about the failure of management and executives to understand and effectively embrace this concept, which is one that seems rooted in basic common sense.

      The second characteristic of a CAS to be explored is resiliency. Resiliency allows a system to respond to a disturbance while maintaining equilibrium within its system boundary. In supply chain words, resilience is how well a system can return to stability when it experiences random or self-imposed variation. Resilience arises from the subsystem’s ability to respond to the feedback loops that regulate equilibrium. The ability to adapt and the diversity or flexibility of options/actions determines how quickly the system can recover and/or improve. The opposite of resiliency is rigidity.⁹

      Obviously, if a system is insufficiently resilient relative to the level of disturbance, it is at risk of collapse. Reeves, Levin, and Ueda identified six basic risks to the resiliency of a complex system.¹⁰ Any organization wishing to avoid the threat of collapse must mitigate these risks. In the VUCA world these risks are more prevalent than ever.

      

The COLLAPSE risk. A change from within or outside the industry renders the firm’s business model obsolete. An obvious example is the impact that the emergence of online retailing giants such as Amazon had on the retail industry. At one time Sears and Roebuck was the largest retailer on the planet, headquartered in the tallest building in the western hemisphere, The Sears Tower. Sears initially built its empire through catalog sales, selling hardware, appliances, tools, and even plans for homes (The Craftsman). By 1980 the vast majority of the United States population had a Sears store or outlet within an hour drive. At the time of this writing Sears is but a shell of what it had been, struggling to meet cash commitments and desperately trying to find a way to survive. After being bought by Kmart to form Sears Holding, the Sears Tower is now the Willis Tower. The building is no longer the tallest in the western hemisphere and United Airlines now occupies much of the building. Sears Holding continues to sell brands and close stores from its location in Hoffman Estates, IL, a suburb of Chicago.

      

The CONTAGION risk. Shocks in one part of the business spread rapidly to other parts of the business. In 2018 Ford had to close its profitable F150 assembly plant due to a fire in a Chinese-owned supplier located in Michigan. The fire affected many auto suppliers, but the hardest hit was Ford, specific to the F150 truck. The F150 is a multibillion dollar brand for Ford and substantially drives Ford’s profits.

      

The FAT-TAIL risk. Rare but large shocks, such as natural disasters, terrorism, and political turmoil. Examples here include the tsunami in Japan that affected the automotive and electronics industries. September 11, 2001 stopped industry across the United States and many companies never recovered, especially the airline industry. Massive consolidation and cutbacks in flights and service redefines the new airline industry.

      

The DISCONTINUITY risk. The business environment evolves abruptly in ways that are difficult to predict. The financial crisis of 2008 created the biggest disruption to the U.S. housing market since the Great Depression. Increased foreclosure rates