BOOK REVIEW: FRANK DILLONreviews
Chaotics: The Business of Managing and Marketing in an Age of Turbulence, by Philip Kotler and John A Caslione, McGraw Hill; £23
TRADITIONALLY, businesses operate in two cycles with radically different game plans. In growth periods they see opportunities everywhere and spend freely to capture what they can; in recessionary times they batten down the hatches, cutting costs and investments to ensure their survival.
In Chaotics, Philip Kotler and John Considine argue that this approach is outmoded and that we are living in an era of continuous turbulence that requires a new strategy.
In this new order, steady gradual rises and falls will be replaced by more abrupt and erratic shifts. The book prescribes a course for managers through this uncertainty.
While turbulence has been evident for some time the authors argue that the recent financial crisis has served to heighten events. For one thing, a new chapter in global economic history has begun and it is one in which the United States and to a lesser extent Europe will no longer play the dominant roles as power shifts to resource-rich countries and rising industrialised nations in Asia.
Emerging market companies such as Brazil’s Petrobras and InBev, Russia’s Gazprom and Severstal, India’s Reliance and Tata and China Lenovo and Huawai will increase turbulence and disruption. These companies are growing at a rapid pace and are well positioned to acquire major western firms before the current recession ends.
The potential role of sovereign wealth funds – especially Chinese and Middle Eastern ones – is also identified in this context. During the financial crisis of 2008 several US and European financial institutions avoided bankruptcy by accepting help from these funds, an indication of where power now lies.
Other turbulent forces at play include technological advancement, disruptive technologies, the environment and increasing customer empowerment.
Less well characterised turbulent influences include what the authors describe as hyper-competition. This occurs when technologies are so new that standards and rules are in continuous flux so that competitive advantages cannot be sustained for long. Advantage is continually created, eroded, destroyed and recreated by firms that can disrupt markets and act as if there are no barriers to entry.
In responding to turbulence, the authors caution against across-the-board spending cuts arguing for a more focused approach to budgets. Common mistakes include firing talent, reducing product development, retreating from globalisation and reinforcing hierarchy over collaboration.
Instead, companies need to adopt a tough mindset, taking practical decisions to give them a fighting chance of survival. Responsiveness, robustness and resilience are required.
The differing approaches of Starbucks and McDonald are cited. Starbucks profits dipped 97 per cent in the third quarter of 2008 while McDonald’s grew 8 per cent. McDonald’s response to the recession – lowering prices and reducing quantities in new branded promotions to match consumer needs – contrasts with its rival’s inertia. Now, McDonald’s is seizing on the weakness of its rival by launching 14,000 coffee bars in its restaurants.
The failure of the giants of the US auto industry to anticipate change is another case in point. The industry had multiple strategic inflection points before they found themselves looking for bailouts from Congress in November 2008. Yet, it persisted with old business models of developing and perpetuating internal combustion engines based on petroleum energy fuels instead of looking at alternatives years earlier.
To stay up in the game, business leaders need to see change or new behaviour themselves, rather than merely reading about it in magazines or consultant reports. They need to make sure that unpleasant truths are not filtered before they get to the top.
Suggestions include establishing a shadow executive committee whose members are a generation younger than the top team or to tell everyone in the company that the chief executive’s office accepts e-mail from employees, either open or anonymous, proposing new ideas for making or saving money. Leaders should also accept the inevitability of strategic decay and be honest enough to recognise when their well-worn strategies are losing steam.
At the heart of the book, the authors propose a three-stage system for detecting, analysing and responding to turbulence and the resulting chaos.
Crucially, organisations should develop an early warning system to identify both the vulnerabilities of the business and potential opportunities that could result. Often advance warnings are actually observed by many within an organisation who just don’t realise the importance of what they see.
Toymaker Mattel, for example, lost 20 per cent of its market in the three years to 2004 by failing to see the vulnerability of its Barbie doll range. Rival MGA recognised that preteen girls were maturing more quickly and preferred dolls that looked more like their teenage siblings and the pop stars they idolised. The resulting Bratz line not alone savaged Barbie’s market share in the short-term but irreparably narrowed its market.
The importance of scenario planning is discussed in detail and a distinction is made between it and contingency planning that normally focuses on just one major variable. Constructing scenario plans – a form of war-gaming – helps business leaders understand how the various threads of a complex tapestry move if one or more threads are pulled. When teams explore all of the factors together they soon realise that certain combinations can magnify the impact.
Some companies have developed fast and automatic response systems to market changes, the authors note. The Swedish furniture giant Ikea is a case in point. When sales of selected expensive items drop in either a single store or in a predefined area, it automatically increases the floor space devoted to cheaper items and decreases the area showing expensive ones. It does the reverse when sales of expensive items increase.
Kotler and Caslione have produced a timely and thoughtful analysis of the turbulent economic environment in which we now live, with a series of practical responses to the challenges faced.
Frank Dillon is a freelance business journalist
