In respect to short-term phenomena, there is no system. There is only chaos.
The fastest growing field of modern mathematics is the theory of complexity. It shows, with rigorous mathematical proof, that complex systems do not allow prediction; they are controlled by factors that are not statistically significant. This has become known as the “butterfly effect”: a whimsical but mathematically rigorous (and experimentally proven) theorem shows that a butterfly flapping its wings in the Amazon rain forest can and sometimes does control the weather in Chicago a few weeks or months later. In complex systems, the climate is predictable and has high stability; the “weather” is not predictable and is totally unstable. And no complex system can exclude anything as “external.” In respect to the weather, that is, in respect to short-term phenomena, there is no system. There is only chaos.
Economics and economic policy deal with short-term phenomena. They deal with recessions and changes in prices. Contemporary economics and economic policy assume that the system, the long term, is made by short-term policies, for example, changes in interest rates, government spending, tax rates, and so on. For a complex system this is simply not true, as modern mathematics has now proven.
There is one fundamental insight underlying all management science. It is that the business enterprise is a system of the highest order: a system whose parts are human beings contributing voluntarily of their knowledge, skill, and dedication to a joint venture. And one thing characterizes all genuine systems, whether they be mechanical like the control of a missile, biological like a tree, or social like the business enterprise: it is interdependence. The whole of a system is not necessarily improved if one particular function or part is improved or made more efficient. In fact, the system may well be damaged thereby, or even destroyed. In some cases the best way to strengthen the system may be to weaken a part—to make it less precise or less efficient. For what matters in any system is the performance of the whole; this is the result of growth and of dynamic balance, adjustment, and integration, rather than of mere technical efficiency.
Primary emphasis on the efficiency of parts in management science is therefore bound to do damage. It is bound to optimize precision of the tool at the expense of the health and performance of the whole.
The only profit center of a business is a customer whose check hasn’t bounced.
Strategy has to be based on information about markets, customers, and noncustomers, about technology in one’s own industry and others’, about worldwide finance, and about the changing world economy. For that is where the results are. Inside an organization there are only cost centers.
Major changes always start outside an organization. A retailer may know a great deal about the people who shop at its stores. But no matter how successful, no retailer ever has more than a small fraction of the market as its customers; the great majority are noncustomers. It is always with noncustomers that basic changes begin and become significant. At least half of the important new technologies that have transformed an industry in the past fifty years came from outside the industry itself.
The axiom that an enterprise should aim for maximum integration is obsolete.
The traditional axiom that an enterprise should aim for maximum integration is becoming obsolete in the new corporation. There are two explanations for the “disintegration” of the enterprise. First, knowledge has become increasingly specialized. Knowledge is therefore increasingly expensive, and also it is increasingly difficult to maintain enough critical mass for every major task within an enterprise. And because knowledge rapidly deteriorates unless it is used constantly, maintaining within an organization an activity that is used only intermittently guarantees incompetence.
Second, by now the new information technologies—Internet and e-mail—have practically eliminated the physical costs of communication. This has meant that often the most productive and most profitable way to organize is to disintegrate and to partner. This is being extended to more and more activities. Outsourcing the management of an institution’s information technology, data processing, and computer system has become routine, for instance.
The multinationals of 2025 are likely to be held together and controlled by strategy.
Statistically, multinational companies play much the same part in the world economy today as they did in 1913. But they have become very different animals. Multinationals in 1913 were domestic firms with subsidiaries abroad, each of them self-contained, in charge of a politically defined territory, and highly autonomous. Multinationals now tend to be organized globally along product or service lines. But like the multinationals of 1913, they are held together and controlled by ownership. By contrast, the multinationals of 2025 are likely to be held together and controlled by strategy. There will still be ownership, of course. But alliances, joint ventures, minority stakes, know-how agreements and contracts, will increasingly be the building blocks of a confederation.
This kind of organization will need a new kind of top management. In most countries, and even in a good many large and complex companies, top management is still seen as an extension of operating management. Tomorrow’s top management, however, is likely to be a distinct and separate organ: it will stand for the company.
Increasingly, the economic process depends on structures built upon alliances, joint ventures, and outsourcing. Structures that are built upon strategy, rather than ownership and control, are becoming the models for growth in the global economy. Executives in these partnership structures should organize and manage corporate strategy, product planning, and product costing as one economic whole.
Take for example, a leading global manufacturer of consumer goods. Formerly the company assumed that the more in-house manufacturing it did, the better. Now it is asking, “Where do activities belong?” So, it has decided to place finishing activities into many of the 180 countries where the customer is located. But it produces itself fundamental compounds for the products only in a few regions of the world. For example, a large plant in Ireland serves all of Europe and Africa. The company is in-sourcing the basic compounds to achieve quality control, but it is outsourcing final assembly. It is looking at the entire value chain and decides where to place various activities.
We don’t know yet which goods and services will turn out to be most suitable for e-commerce. But we do know that any success in selling through e-commerce, whether business-to-business or business-to-consumer, is going to be seen as a threat by the traditional distribution channels, such as the supermarkets or the local offices of the brokerage houses. “It is going to CANNIBALIZE our business,” the traditional distributors will scream. Actually, if past experience is any guide, it may, in many cases, ADD traditional business and actually, increase their business and their profits. That’s very often the result of a new distribution channel.
But we won’t know that for a good many years. Nor will we know for some years which goods and services will lend themselves to distribution through e-commerce. And there’s no point in trying to guess. So the decision to push e-commerce is a risky one. And yet, no business can risk NOT pushing e-commerce if there’s the slightest indication that it will become an important distribution channel for its goods and services, if not the most important one.
Selling is tied no longer to production but to distribution.
E-commerce is to the information revolution what the railroad was to the industrial revolution. The railroad mastered distance—e-commerce eliminates it. The Internet provides the enterprise with the ability to link one activity to another and to make real-time data widely available, both within the company and to outside suppliers, outside channels of distribution, and customers. It strengthens the move to disintegrate the corporation.
But, the great strength of e-commerce is that it provides the consumer with a whole range of products, no matter who makes them. Examples include Amazon.com and CarsDirect.com. E-commerce separates, for the first time, selling and producing. Selling is tied no longer to production but to distribution. There is absolutely no reason why any e-commerce facility should limit itself to marketing and selling one maker’s products or brands.
