A blog covering the behavioral economic impact of COVID-19.
EDGE OF CHAOS, part 1
A relatively unknown concept in the business and economic world is that of the Edge of Chaos. Adapted from the principles of a similar idea among technology creators, the Edge of Chaos is a balance of practice between total order and total disorder. It is an exercise of having just enough of a structure to maintain order but allowing for openness to chaotic situations. Businesses that do this the best are ones who seek out disorder to help create marketplace opportunities.
The most successful businesses are ones who are adaptable to almost any circumstance that is presented to them. This is an openness to chaos through systematic planning. In order to accept, and even benefit from chaos, a business must be open to the idea that nothing can or should be static within their business model. The static aspects of a business are typically a given and are, for the most part, unchanged. These are the normal order functions that allow each business to compete within pre-determined risk areas. The goal of operating in the Edge of Chaos is to discover new opportunities for performance peaks both organizationally and macro-economically outside of this normal order. The more chaos is thrown at a business that works within this middle ground, the more it should be able to capitalize on performance.
Through our present economic unknowns, I am continually telling businesses to focus on what they are learning. Within a week, most of us have learned how prepared we are to meet the challenges of chaos. Having a willingness to accept chaos as a necessary challenge in the overall strategic process can allow the business to be less burdened by most chaotic events.
EDGE OF CHAOS, part 2
We continue to read stories each day of struggling businesses attempting to operate within this new, hopefully temporary, economy. But then we see those that appear to be thriving based on their adaptability. This is an example of those businesses that operate consistently within the Edge of Chaos. They have action plans of adaptability that not only secures their business application, in many cases, it helps efforts of crisis minimization. It is important to note, most of these businesses did not all at once become adaptable, it takes years of operating with acceptance of change.
We see this example in those businesses that have now begun producing essential products that may be otherwise limited. Companies that have never made hand sanitizer are now experts in that field, those that have never had a medical contract in their history are now focusing their operations on medical resources. It is important to not just focus on their efforts but their speed at which they were able to shift their focus.
We have not seen an industrial and economic response from manufacturing like this since WWII. However, even in the 1940s, the shift in manufacturing to aid in war efforts did not come without effort and time. We are less than two weeks into this official crisis and already have seen massive shifts in operational focus by some of the world’s biggest companies. Again, we have to draw attention to this idea of operating at the Edge of Chaos. I am reminded of the United States Coast Guard’s motto Semper Paratus, a Latin phrase meaning “always ready”. These businesses did not recreate their strategic model overnight, they are continuously ready for change and able to adapt no matter what the adversity may be or when it may happen.
I continue to tell businesses to focus on what they are learning during this time that will not only help in their recovery but help themselves better respond to adversity and change in the future. Learning ways to operate with a balance between total order and total responsiveness is not only beneficial, but it may also be totally necessary.
Change is difficult for any of us, any business, at any point in time. We are now dealing with unparalleled episodic change like most of the working world has never experienced. In order to effectively manage this change and ensure that our economics emerge with any level of success, we need to begin to look at the changes that are hard-sided or transformative. This is not to say that we are acquiescing to the “new normal” but take what we are learning to bolster our business and economic strategy into the future.
A 1992 study from Harvard Business looked at the necessary focal points of hard change in order to give businesses the ability to quickly adapt and create a more effective strategic framework from the changes taking place. The consideration factors most necessary to evaluate are duration, integrity, commitment, and effort.
Duration is typically defined in change management through a timeline. Unfortunately, none of us have a very accurate timeline to work against. So, we must come up with organizational and operational milestones. These can be spaced apart as frequently or infrequently as is necessary but need to be planned and consistent to achieving typical strategic goals despite the present interruption. Milestones can be very small, individual, or large and companywide. They should be achievable but also test your organization’s capabilities of continuing to maintain during this time.
Integrity comes from both you individually and your staff. Most immediately for many businesses that have now gone to total work from home model, integrity is the most important factor as everyone’s self-accountability must be heightened. Trust is an important part of maintaining organizational integrity but, especially during this time, trust can be lost quickly.
The effort is what it is going to take to implement action to adhere to the change. This is the amount of effort needed to not only ensure today’s capabilities but to help plan for the future and create opportunities for growth.
WHAT IS BEHAVIORAL ECONOMICS?
Behavioral economics is the study of the psychological, social, cognitive, and emotional factors that influence the purchasing power of individuals and institutions. Consequently, behavioral economics is the most immediate solution to market price, return, and resource allocation equations. Within this, there are multiple factors that influence the purchasing power of the consumer, both in B2B and B2C categories. The research that has been done in this field has connected many common economic principles such as scarcity, game theory and borrowing, but has combined some common core physiological studies such as conditioning and socialization. Behavioral economics combines the thinking of great economic minds with the reasoning research of those in psychology studies.
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