About ten years ago I started to notice a pattern in economic trends. One day, while discussing my perception with my accountant, he suggested to look for ‘Kondratieff’ (or Kondratiev). Indeed, Kondratieff confirmed what I had witnessed and since then my view of business incorporates historical context. And it helped me, not just to account for today’s events but also to foresee the future of business.
Nikolai Dmitriyevich Kondratiev was a Soviet economist (1892-1938). He is best known for proposing the theory that Western capitalist economies have long term (50-to-60-year) cycles of boom followed by depression. These business cycles are now called “Kondratiev waves” or K-waves.
To provide proof that capitalist economies were subject to spontaneous and recurrent depressions and recoveries, Kondratiev did extensive price analysis of goods in the German, British, and French economies. Among the prices studied were raw materials and output products, interest rates, foreign trade, wages, and bank deposits.
Economist Carlota Perez would later attribute these long waves to technological revolutions, in effect applying the theory of creative destruction by economist Joseph Schumpeter ─ also known as disruptive innovation as it was coined by Harvard Professor Clayton Christensen – to economic cycles.
If you take a look at the figure to the right, representing Kondratieff’s business cycle and its four stages (expansion, crisis, recession, and recovery), you may even recognize the layout of the ROUNDMAP.
Let’s have a look at two books, both covering a similar subject: What makes some companies perform better than others? And let’s place them in context of Kondratieff’s long wave.
In search of excellence (1983)
One of the first management books I read was the bestseller “In Search of Excellence” by Tom Peters and Robert Waterman (1983). The authors identified 8 basic principles to stay on top of the heap ─ based on an index of 43 companies that were deemed ‘excellent’ ─ which meant that on average they outperformed the Dow Jones Industrial Average and the broader S&P 500 index by as much as 25%.
During the time the book was published, America was still suffering from a recession combining high unemployment coupled with inflation. Major industrial companies like Chrysler had to be bailed out, the oil crisis concentrated wealth among Arabian plutocrats and the threat from a seemingly dynamic Japan seemed insurmountable (just-in-time production, kanban and manufacturing resource planning).
To put the eight principles (lef) in a more contemporary context, we’ve added a second list (right):
Eight Principles of Excellence (1983):
- Bias to action
- Stay close to the customer
- Promote autonomy and entrepreneurship
- Productivity through people
- Executives need to be hands-on and values driven
- Focus on the business the company knows best
- Keep a simple form and few layers of management
- Foster tight adherence to values and high tolerance for employees accepting the values
These findings provided American executives, that were desperately trying to break free from years of depression, in an economy that was already on the rebound, with some useful guidelines.
EXPONENTIAL ORGANIZATIONS (2014)
In 2014 the book Exponential Organizations appeared, with the subtitle: ‘Why new organizations are ten times better, faster, and cheaper than yours (and what to do about it)’. According to the authors, Salim Ismail, Michael Malone and Yuri van Geest: “In business, performance is key. In performance, how you organize can be the key to growth.”
The core notion is simple: Rather than increasing human capital or physical assets, the most successful 21st-century companies leverage information and technology to achieve rapid expansion in pursuit of a
“Massive Transformational Purpose” (MTP). In doing so, they’re able to scale their business strategies, culture, organizational frameworks and purpose at the same rate as the technology, i.e. one that follows an exponential curve.
“An Exponential Organization is one whose impact or output is disproportionately large — at least 10 times larger — compared to its peers because of new organizational techniques that leverage accelerating technologies. In other words, it grows faster, bigger and cheaper than its competition because it has a Massive Transformative Purpose and scales as quickly as tech does.”
“The Massive Transformative Purpose is bigger than a mission statement; it’s why you do what you do, why you get up in the morning and why your organization exists. It’s a higher, aspirational purpose, and it’s about thinking big. Radical transformation is its goal. Examples of some great MTPs include Boston Children’s Hospital (“Until Every Child is Well”); Best Friends Animal Rescue (“Save them All”); TED (“Ideas Worth Spreading”); and Google (“Organize the World’s Information”). These are big, ambitious, grand challenges and the directional north star for their respective organizations.”
Again, we need to place this book in its proper context: we had just left behind the financial crisis of 2007-2009 while most companies were still suffering the consequences. We believe the financial crisis was mistake, caused by a mark-to-market bookkeeping rule, however, the market appearantly still needed a correction and took another nose dive, following the May 2000 dotcom bubble-burst.
While the suggested approach may still be valid ─ as described in “Where to find future growth” ─ we feel it should not be regarded as a medicine for “disproportionately large growth rate”, rather as a cure to survive the upcoming economic crisis and mitigate possible core business disruption (see figure below).
The book In Search of Excellence (SeO) was published shortly after the bottom-out of an economic crisis, Exponential Organizations (ExO) appeared just before it ─ we are mere months away from what may be the most devastating economic crisis ever. Both books hero a series of companies that stood out from the crowd based on either their structure or their scalability.
Regardless of the recommendations found in both books, it will always be about creating the right value, at the right price, delivered to the right group, using the right channels, and to capture enough value in the process to make a profit. Whether your firm is capable of executing its mission with ‘excellence’ or is able to scale ‘exponentially’ may not be the first thing to worry about.
If we have learned anything from multinationals like SONY (walkman-successor debacle), Kodak (celluloid-film blunder), or Blockbuster (video-rental disruption) that drove these companies to ‘bite the dust’ of their now-absolete technologies and business models, is that no competitive advantage offers enough assurance to survive in an era in which many of the current technologies, developed in the previous century, are now being replaced ─ and eventually displaced ─ with alarming speed.
To cope with these complex circumstances, companies need to diversify, start new initiatives, not by improving the past but based on a vision of the future. This may lead to some complete misses but this is part of the times we live in: we can’t afford to be penny-wise, we need to be pound foolish.