Business ecology report
From pedalling bicycles to articulated lorries in China
I would like today, to address some themes I picked up from the Financial Times website.
I would like to do this much more; I like to start my lectures and workshops this way, namely by starting the event by simply referring to the news of that day or at max that week. I learned this from Johan Donovan (MIT), whose lectures dealing with the topic of e-business my wife and I followed several times - invited by HP’s executive Gert Jan de Kruyff. I loved to call Mr Donovan the extreme matter-attached genius and one loves him or hates him, I guess. Anyway, he always started with citing a whole series of newspaper articles from that very morning linking to the relevance of that very day’s lecture. I always thought, his way of doing so challenged both himself as well the audience which I appreciated.
Business ecology is for many people a far cry from their daily life, but we are steeped in it like the air around us. So, the daily newspapers, examples from daily life, quickly bring to life the fact that complexity thinking, ethology, cybernetics and all those paradigms are really business as usual.
I would like to address here one key issue that always pops up: Newtonian cause and effect thinking versus complexity thinking.
In the whole feedforward flow and one of its derivates, the S-curve, I see cause-effect thinking as the area where things are easily tangible, predictable, and manageable This is an important element of harnessing the success of what has been achieved so far. Cause and effect thinking belongs to a mindset that tells us we should be in control and that being out-of-control is high risk.
Complexity thinking, on the other hand, is seen at the beginning of the S-curve and also at the stage of transforming from an old S-curve to a new one. Complexity thinking shows that organisations should start their growth organically and not try to be planned from scratch. Complexity thinking belongs to a mindset that tells us we can never be in total control if we are to adapt and grow naturally and we therefore need to live with this discomfort, not try and eradicate it. Complexity theory helps us to understand the power of complex systems and their emergent properties and although we have to do the small things well and consistently, we do not need the high levels of control suggested by cause and effect thinking.
My belief is that it is not a case of either:or with respect to cause and effect or complexity thinking. One is not superior to the other. It is more a case of and:and – both are important – but at different stages of the organisation’s life-cycle.
Let’s look to an example. I will show both sides of the thinking - cause and effect/ top of the S-curve versus complexity /bottom of the Feedforward hierarchy thinking.
The example deals with the way Carrefour and Wal-Mart approach the Chinese market as explored in an article by Elizabeth Rigby “ China’s retail revolution: Smooth supply in high demand” published: February 13 2007 in the Financial Times. It is almost impossible to illustrate better the cause and effect/ design type thinking Wal-Mart follows than the following citation:
“ Sueng Lee, Wal-Mart China’s supply chain director, jumps out of the people carrier, lights a cigarette and admires his latest piece of kit – a new 40,000 sq m distribution centre in Kengzi, an hour’s drive from downtown Shenzhen.
The building may be state-of-the-art and have 70 huge doors designed to handle deliveries from three-and-a-half tonne articulated lorries, but you are as likely to see someone pedalling a bike on the new roads around the site as driving a giant truck to collect goods for a Wal-Mart store. Today two men are unloading small boxes packed with Thai sweet chilli sauce from a little black van.
But for Mr Lee, an American-born Korean who has been in
Summarising, the rest of Wal-Mart’s approach is:
- investing heavily in a sophisticated PRC wide distribution network
- highly centralised distribution and control of deliveries
- just a few just-on-time deliveries per day to the stores
- focus on centralised buying, ordering huge volumes and negotiating rock-bottom prices
Although Wal-Mart has only 0.2% of the Chinese market with 66 stores, it believes strongly in the need for this well planned, organised, high investment approach to create future competitive advance in the PRC.
This is a typical top-of-the-S-curve design, cause-effect way of thinking. By which I mean these are building blocks associated with supporting a business activity at the top of the S-curve – following a successful strategy, maximizing performance, squeezing assets.
As an observer, I am inferring from Wal-Mart’s strategy – that they see the development of
Carrefour, their competitor, approaches the PRC totally differently.
- it operates stores (about 90) as self-contained units
- most of them manage their own supply chain and local distributors
- they work to the local economy
- they identify new potential options for stores based upon local opportunities
- the stores do have de facto a lot of power delegated to them
- store managers are responsible for being competitive and their performance
Wal-Mart is implementing its standardised model and is centralised; Carrefour has a flexible model and is decentralized. Wal-Mart’s strategy requires up-front investment; Carrefour is paying as they go for new stores. At this stage Wal-Mart is still making losses and Carrefour is profitable, but it is early days.
Analysts at this moment favour more the approach of Carrefour. In the FT article, a consultant is cited as saying that “Wal-Mart has been focusing on the back-end and not the customer. Carrefour has kept the focus on its consumers.”
This is a typical, in terms of business ecology, example of the difference between a feedback oriented strategy versus a feedforward strategy. The Wal-Mart approach is a norm driven by financials, the Carrefour approach is much more driven by the tangibles one can shake hands with, i.e. the customers. The Carrefour approach is a good example of a feedforward oriented approach.
Over time, when the supply chains in the PRC have also improved, Carrefour must improve on the advantages of scale because it will be likely that the number of products will become inefficiently high. By then, the back-end/ error-controlled/ cause-effect strategy of Wal-Mart would fit better.
At this point in time, many Chinese local firms are catching up. They do have many local advantages like location, government contacts regarding real estate and the typical chinese guanxi (network). It is Carrefour that has been quickest in realising how important these connections are and allying with local firms to create a reciprocal advantage; the French securing sites, the Chinese learning modern logistics, for example.
The outcome of the Wal-Mart versus Carrefour strategy is still uncertain.
From a shareholder point of view, the Wal-Mart strategy may be more popular, as, although requiring upfront investment, past experience of this model has always worked. The Carrefour way, however, asks for more patience as the business grows organically.
From a business ecology perspective, the Wal-Mart way seems to be more of an ‘all or nothing’ strategy, and Carrefour’s approach seems to be more resistant against failure because it is more integrated within the PRC ecosystem of culture and local business. For this reason it is the one I prefer as it seems to be a more lasting, secure and integrating way of doing business and contributing to society. No complete guarantee, but definitely the one I would favour.
Whatever my personal opinion, this does pose a big question for leaders intending to break into new and quite different marketplaces such as
One can quickly see how answering these very simple questions can result in quite different, and complex, responses. It also shows how the two approaches are visible in daily life. This point was the main purpose of my business ecology report this week.
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