Five Forces of Complexity and Change

By: Langdon Morris

In this chapter of The Innovation Formula Langdon Morris examines five forces of change: technology, science, culture, the human population and climate change. The convergence of these five trends largely defines the modern world and the market environment to which we must adapt and respond. Understanding them will set the framework for the choices you will have to make, and the processes you will implement in order to create and implement your own organization’s innovation process.

Complexity and change is occurring fast today, and it’s getting faster. This is not news; you’ve heard it before, and doubtless you will hear it again. You also know it from your own experience.

So while we recognize that it’s not going to be particularly useful in this book to get into an exhaustive discussion of how change is happening or why its happening, we also think it would be a mistake to skip the topic entirely. Because the bare and inescapable facts of increasing complexity and accelerating change in the external market are the major forces that define the absolute necessity for innovation in your business, and in every business. Therefore, it’s a critical issue to think about change as we set out to design your organization’s innovation process and program.

Of course if change wasn’t occurring, or if it wasn’t occurring so fast as it is, then it’s possible that you could avoid or evade the innovation imperative. But it is occurring, and it’s doing so at a tremendous pace, and so your organization is required to innovate in order to survive.

Hence, it’s not enough to wave your hands vaguely and say, “Change is coming.” Instead, it’s entirely necessary to be quite precise about what’s changing, and also why it’s changing. Therefore, the following few pages constitute a summary is intended as a necessary overview of what’s happening, as this is the essential context in which your innovation work will proceed.

Of course there are a multitude of ways to explain what’s changing, and we make no pretense that what we offer here is entirely definitive. Instead, our intent is to provide you with a quick description and perhaps even inspire you to see possibilities, both good and bad, that may lie in your own organization’s future.

To bring the vastness of this topic down to manageable size we’re focused on describing at a high level the five major trends that we believe are essential to understanding what is occurring today, and more importantly what will be occurring still tomorrow.

The five trends are technology, science, culture, the human population, and climate change. These are certainly very big topics, but even a quick review of the big ideas behind them will help to set the framework for the choices you will have to make, and the processes you will implement in order to create and implement your own organization’s innovation process, through which you’ll be able to respond effectively to these global trends as well as the specific local challenges that arise for your own business.

Technology

The first major theme, technology is an urgent, day-to-day or even hour-to-hour issue for today’s firms, and no matter in what industry you compete, for your firm as well. Digital technology is taking over the economy, industry by industry, and the entire global economy is in the process of becoming digitized.

Digitization has equaled disruption for every industry that it has touched, and before the trends are fully resolved, no part of the economy will remain untouched.

This matters because digitization has equaled disruption for every industry that it has touched, and before the trends are fully resolved, no part of the economy will remain untouched.

One of the significant consequences of this trend is that digital markets have a unique and brutal characteristic, the tendency of leading firms to consolidate their power and to gradually vanquish their competitors, sector by sector. In digital markets there is often little to zero market share left for laggards, and so these markets are more and more coming to be understood as “winner take all” markets, where there is only first place and there is no second.

This dynamic is becoming more prevalent, and thus the number of winner-takes-all markets is increasing, because technology advantages often create massive barriers to competition. Whereas in the past, for example, a wide variety of local stores usually competed within a given geographic region, today due to better transportation, logistics, telecommunications and information technology systems the leading firms are extending their lead and effectively locking out the local players.

This might be called the “Wal-Mart effect,” for the giant retailer has had a devastating impact on small business in many of the towns and regions where its stores are located. Wal-Mart’s size, pricing advantages, and enormous selection have put thousands of local merchants out of business. Wal-Mart’s massive scale gives it significant advantages over local competitors. With volume purchasing it negotiates better prices from suppliers, and puts in place even better technology that smaller firms simply cannot afford. This becomes a self-reinforcing spiral, and only a fundamental shift will dislodge them. And what is the core driver of their ability to reach scale? Digital technology, which is essential for managing the supply chain, product design, manufacturing, logistics, finance, treasury, human resources, and operations.

Similarly, the retail market for books has transitioned from one led by local bookshops and a couple of national chains, to one dominant digital player, Amazon. Thousands of local shops have closed, unable to compete with Amazon’s prices, selection, and delivery. The company then extended its advantage by creating the Kindle, which then become the dominant winner in the e-reader market.

This is relevant to small business leaders in two ways. First, the scale of the global digital market means that any of the big players can look and act local. Geography isn’t much protection, and it may not be any protection, if a big firm wants to compete for your customers.

…you ought to be paying close attention to the strategies they use to be successful, because sooner or later, and probably sooner, every business, including yours, is a digital business.

Secondly, as the entire world continues the transition to becoming a single massive digital marketplace, and as every industry feels more and more the impact of digitization, the consequences are that, as I mentioned above, you have to think of your business not as whatever it used to be, but as it will be, which is a digital business. Consequently, while you may glance over at that neighboring firms that are in some way or other competing in the digital marketplace and feel sorry for the intense speed and complex global dynamics that they have to deal with, you ought to be paying close attention to the strategies they use to be successful, because sooner or later, and probably sooner, every business, including yours, is a digital business.

Wal-Mart, in other words, is a digital business every bit as much as Amazon is, and every bit as much as your business is also. And since technology has shifted many market structures to the winner- take-all modality, the biting words of journalist Dana Blankenhorn make the point pretty well: at that point “there is one winner and everyone else needs to find something else to do.”

Until, that is, a new generation of technology is invented, and then we start all over again with a new generation of competitors who will offer something that Amazon or Wal-Mart do not offer.

Another dimension of advancing technology is its impact and application in many markets beyond the retail space in which Amazon and Wal-Mart compete. In the energy industry, for example, the shift to new sources is facilitated by the development and application of digital technology that used for collecting and managing solar and wind devices. Technologies like the “smart grid” that manages the large scale distribution of energy, and the smart thermostat, which manages the energy usage in your home, are all digital.

If your firm is in printing, then you already know how much digitization has affected the economy; in the US, the overall amount spent on printing services dropped from $120 billion to $80 billion between 2002 and 2010; at one point nearly three print shops were going out of business each day as the entire industry was downsized. And why did this occur? Because digital documents sent over email don’t have to be printed.

The advertising industry went through a radical transformation as Google went from a search engine company to the world’s largest ad agency, and diverted billions from the ad firms to itself over the course of the first decade of this century.

The music business was similarly transformed as listeners shifted from tapes to CDs, and the MP3. The iPod and iTunes changed the way people collect and listen, and global revenues for the music industry dropped by two-thirds.

One last example is the growth of the Chinese economy, which from 1990 to 2010 expanded from x to y as the country transformed itself into the world’s most concentrated center for manufacturing of all products from furniture to phones to clothing and toys. None of this could have happened were it not for the digitization of the global supply chain, simply because the coordination and management of the massive complex logistics could never have been accomplished without ubiquitous digitization, from the design on digital CAD software to the manufacturing in digital factories to the storage, shipping, and distribution through digitized inventory tracking and control.

…we are still in the early stages of the digital transformation, so we can expect significant new disruptions are still in our future.

These examples – retail, energy, printing, advertising, music, and manufacturing – are but six among hundreds. In fact, during the last two decades literally every industry has been transformed by digital technology, and many have been severely disrupted. And the point for us is that we are still in the early stages of the digital transformation, so we can expect significant new disruptions are still in our future.

Conceptually this makes intuitive sense, but we can go beyond intuition as there is hard data to support this forecast. A key data point is the cost of computer technology, which continues to plummet. For example, the smart phone you’re likely to be carrying around is a sleek and sophisticated device that obviously provides a lot of computing power into a convenient little package, but suppose it was the mid-1970s and you were going to buy the equivalent amount of computing in terms of the processing and storage. How much would you have paid for it?

Four decades of continual progress in miniaturization and constant expansion of the market size have resulted in devices that sell for around $500 today, but which pack the processing power equivalent to tens of millions of dollars worth of 1974 computing in a package that is a tiny fraction of the size. This process of improvement is unique in human history, as no other industry has been able to achieve such improvement in performance simultaneously with a concurrent reduction in cost.

So of course it has been a process of positive feedback – the more computers can do, the more uses we find for them; and the most we buy them, the more is invested in improving them. Today, every human activity that has anything to do with the exchange of information is digitized, which happens to include every form of economic activity.

The question that needs to be asked, then, is What will be disrupted tomorrow?

Science

The stunning advances of digital technology are of course based on equally stunning advances in science. Today’s scientists are deeply engaged in the study of everything, from the tiniest particles to the enormity of the entire cosmos, and every day new findings and discoveries are announced in a gigantic array of fields and disciplines that are themselves proliferating as knowledge becomes ever more refined and precise and focused.

And as with technology, the rapid advance of scientific knowledge are also accelerating as it has become universally understood that a rigorous scientific foundation is mandatory for a modern nation. Consequently, tens of thousands of scientists and many more times that number of science students are rapidly pushing back the boundaries of ignorance, discovering new laws of nature, new realities that explain the micro and macrostructures and dynamics of matter and energy, and the patterns and processes of the economy and society.

Because success at science is so essential to the success and indeed the survival of every nation, and advances in science are central to the competitive dynamic between nations and regional alliances, science will remain a top priority for national investment throughout the coming years and decades. It will thus be a continuing source of new knowledge that will in turn be a continuing driver of change for the decades to come.

Culture

As we all know so well, technology and science advance together, and together create powerful momentum for change that is amplified by a reinforcing and compounding effect whereby change in one area adds momentum to changes in another, producing a much greater overall impact. Nothing in the modern world exists in isolation, and so many of the forces and impacts are connected and interrelated that the entire system of modern life is in fact caught in a whirlwind of acceleration.

The social and cultural consequences of this are of course as significant as the economic ones. From the 1970s, when Alvin Toffler coined the term “future shock” until now, when future shock has been replaced by “now shock,” the developed world has become a much different place, and the less developed economies of the world have been rapidly catching up.

Many of us, however, are struggling to adapt to the modern world. This is evidenced by the rapid increase in mental illness worldwide, as many of the psychological and learning challenges we face are new ones, and not everyone is becoming adept at the new ways. The wisdom of elders is unrecognized in the crush of the new, and at the extreme these social and cultural changes and the concurrent economic ones provoke an intense reaction that in extreme cases provides an explanation for the marked rise in fundamentalism and violent extremism.

We should not expect life to get simpler or easier in the coming years and decades. If anything happens it will be the opposite, and most of us will endure or perhaps master wave after wave of lifestyle-altering technology, and we will incorporate new tools into our ways of doing the most basic functions of social and economic life. But some, perhaps in increasing numbers, will not master these new ways.

Population

Underlying the size and vitality of the economy is the size and dynamic of the population, and there a direct linkage between economic success of a city, a region, or a nation, and the total number of people, the rate of population growth, and to the overall age distribution.

Interestingly, in workshops and speeches over the past five years I’ve often asked people to share their own predictions for the future of the population, and what I’ve found is that about 98% of people (i.e., almost everyone) have very little idea what’s actually going on with the global population trends. In fact, what’s actually occurring is quite different from the popular image of what’s happening, and the difference is critically important.

As you well understand, population trends evolve over long spans time, decades and centuries, and even millennia. Looking back across one hundred millennia or more, the human population grew fairly steadily throughout prehistory and human prehistory, and as the era of the great early civilizations emerged, despite the constant threat of famine, climate changes, and local events, by about 1800 the human population had a reached about a total of about one billion worldwide.

Everything changed, of course, with the beginning of the Industrial Revolution around 1800, when the human population explosion began in conjunction with the invention of the steam engine and a great convergence of related advances in a huge range of scientific and technical fields including metallurgy, transportation, agriculture, economics, commerce, medicine, and management.

Thus, it took a few hundred thousand years of humanity’s progress to reach a population of one billion, but only a century and a quarter more for the population to double, as between 1800 and 1925 the human population ballooned from 1 to almost 2 billion, as lifespans increased significantly, the mortality rate declined precipitously, and we were able to feed ourselves better than ever before. Humanity built vast cities and enormous national and commercial empires as the modern era dawned.

The population explosion continued unchecked throughout most of the 20th century even with the setbacks of two world wars, the Holocaust, and a couple of major but localized famines, and so adding the third billion to the human total required only about 30 more years.

The interval from one billion to the next thus followed a startling progression, and with the arrival of the fourth billion by the mid- 1970s the dangers that Malthus had envisioned a century earlier seemed to be coming true. We were warned in dire terms of the environmental and social disasters that were immanent, and the alarm bell ringers had a good point.

The world’s leaders responded in a variety of ways. Environmentalism became an accepted movement, and most nations adopted policies to control or counteract pollution, to support public health, and of course China adopted the “one child” policy as a direct attempt to counteract an anticipated population growth that could have been economically and socially disastrous.

Although many people are not aware of it, by the end of the century the rate of population growth has slowed significantly, as the table shows that the interval between the additional billions is now increasing at the rate of growth slows.

This is of course localized, and while some nations continue to expand their populations, in many nations the population is actually declining. In a few the decline is occurring very quickly, and it seems to be bringing with it tremendous social upheaval. Japan, for example, is forecast to decline from a population of about 125 million in 2000 to a population in 2100 of about 65 million, and if this occurs, it will be a vastly different nation, culture, and society as a result.

Japan is definitely not alone in its predicament, as there are now about 60 nations in which population decline has become pronounced, and thus a significant social, cultural, and economic issue.

But who makes those forecasts, and based on what data? The forecasters are demographers, and they study birth and death rates and the other forces and factors that influence how many children people have, the rates of disease and death, and how social trends and public health issues impact on entire populations. They can tell us quite reliably, for example, that nearly 1⁄2 billion people will die in the 21st century as a result of cigarettes, and while their forecasts are not precise to the last decimal, their insights provide essential guidance for economists, policy makers, and business leaders.

There’s a lot of detail behind this that we’re going to skip in order to get to the point, which is that within the next 20 – 30 years the human population will probably peak, and by the end of this century the total population will be about the same or less than it is today.

The consequences will be momentous, and thus in addition to the immediate and deep impacts of advancing science and technology, the longer term trends related to population will start to have broadening impact in the coming years and decades.

For example, one way to interpret Japan’s economic struggles of the last two decades is that the future is not reassuring for nations whose populations are in decline. While no one knows for sure, it is theoretically possible that Japan’s prolonged economic malaise is an early expression of what will only get worse in the forthcoming population decline. The underlying logic suggests that whereas a dynamically growing, economically successful nation must consume a lot to sustain its very growth, consumption patterns in one that is stable or declining in population are quite different, but as this has not occurred on a large scale any where in the modern world, no one is entirely sure.

But suppose that population decline and economic stagnation are in fact related. This would suggest that what Japan is experiencing now is a prelude to what many nations will be experiencing with a decade or two, and what even the global economy may be experiencing a few decades after that. There are a lot of reasons why this may not be a bad things, but it certainly will be a different thing, and the resulting economic disruptions will be fundamental. Hence, we will likely come to call this the “demographic revolution.”

Climate and Energy

Another major trend, the last one of the big five we will discuss here, is one that makes the news nearly every day now. As I write this, a huge storm has just devastated the island nation of Vanuatu, and it has been called “one of the most powerful storms ever to make landfall.” In and of itself this may not be a decisive bit of news, but the fact that ten of the ten most powerful storms of the last century have occurred in the last decade tells us that we will have to contend with a process of fundamental change in the natural world upon which we depend.

According to the US National Oceanic and Atmospheric Agency (NOAA), the frequency of billion dollar storms affecting the US has increased significantly during the last ten years, even when adjusting for inflation. There were 15 such storms in 2011, the most ever.

The key questions are thus “how fast will the climate change,” and “how fundamentally will it change,” and then “what impacts will that have on our organization.” For there certainly will be impacts.

For example, if it becomes inescapably clear that carbon dioxide concentrations are indeed the central driver of this change, as more than 90% of climate scientists now believe to be the case, then the regulation of carbon content throughout the energy industry will also become inevitable, and the shift of the global energy supply away from oil, gas, and coal and toward wind, sun, and water will accelerate.

To put this in perspective, today the global energy market achieves annual revenues of nearly $6 trillion, making it the largest of all economic sectors. (The next five are agriculture, telecom, auto, chemicals, packaged foods, and pharmaceuticals; total world GDP is hard to estimate, but it’s around $80 trillion.) Since about 85% of the total world’s energy supply comes from fossil fuels, the transformation of the sector of the economy upon which nearly everything else relies will affect everything.

And this is already occurring. For example, the price per watt of solar-generated electricity shows a very interesting progression, a spectacular improvement from nearly $80 per watt in 1980, to a few dollars per watt in 2010, to about .20 today. Behind this, of course, are huge investments in science and technology, substantial government subsidies in many countries, including China, Germany, and the US.

If the trend continues, and there are a lot of reasons to think that it will, then soon the price of solar will drop below the price of oil,  and then it may become significantly less, which will give commercial momentum to the environmental or ecological imperative.

Transitioning the entire economy will be a massive and long-lived process, one that takes decades, but conversely to assume that things will remain as they are today is risky at best as a business strategy, and potentially suicidal at worst.

The scale and scope of both the threats and the opportunities are profound, and it is not an exaggeration to call it “the climate revolution.” Still, for most businesses, other than those directly in the energy sector today, it’s probably a longer term issue rather than an immanent crisis.

Changing Change

The convergence of these five forces of change largely defines the modern world, shapes our experiences and our attitudes about it, and also defines the market environment to which we must adapt and respond.

We turn our attention now to the serious challenge that you face, creating innovations to meet the future needs and expectations of the market without taking unnecessary risks.

Taking Action

Each chapter from here forward closes with a few actions items that are intended to help you think about how to apply the ideas and concepts that you’ve just read about.

List the changes; prioritize the top 3. Think about how the changes could impact your business in each of these, prioritize the ones that you think will be most impactful, and devise a quick strategic response.

Another task: identify one of the themes that’s vital to the future of your business, and make it your mission to learn more about it.

By Langdon Morris

Image: Businessman trying to solve a maze questions from Shutterstock.com