The Demand Driven Adaptive Enterprise. Carol Ptak
their ability to compete and/or survive. This means that organizations must find a way to quickly sense and adapt to changes in the environment. What stands in the way?
Today’s conventional management practices have tremendous amounts of inertia driven by software, consulting, accounting, and academic experts. Many of these practices trace their origins back to the 1930s and 1950s. Yet the world looks nothing today like it did at that time. Companies must adapt and innovate or their very existence is threatened. Consider this astonishing research from the Harvard Business Review in an article titled, “The Biology of Corporate Survival:”
“We investigated the longevity of more than 30,000 public firms in the United States over a 50-year span. The results are stark: businesses are disappearing faster than ever before. Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes. That’s six times the delisting rate of companies 40 years ago. Although we may perceive corporations as enduring institutions, they now die, on average, at a younger age than their employees. And the rise in mortality applies regardless of size, age, or sector. Neither scale nor experience guards against an early demise.
We believe that companies are dying younger because they are failing to adapt to the growing complexity of their environment. Many misread the environment, select the wrong approach to strategy, or fail to support a viable approach with the right behaviors and capabilities.”3
But what to change to? How to change and drive adaptation? Is there a safe and effective path to transform a company from a basic planning and operational model developed in the 1950s and measured by financial accounting principles developed in the 1970s and ’80s to an agile and adaptive enterprise capable of staying ahead of today’s hypercompetitive markets and highly complex supply chains? This has been the focus of the authors and their organization, The Demand Driven Institute, since 2011—to articulate a comprehensive methodology that enables a company to sense changes from the market, adapt planning, production and distribution, and drive innovation in real time, resulting in sustainable and dramatic improvements to ROI.
First, the fundamentals. There are three basic necessities that management must always be carefully considering and managing in order to avoid organizational collapse and to sustain and drive better performance:
Figure 1-1 depicts these three critical considerations in a strategic target chart.4 The figure has concentric circles with a green middle, followed by a yellow ring, then a red ring, and finally a dark red ring. The area is equally divided into three sections: working capital, contribution margin, and customer base. The outer circles are the biggest cause of concern. As the measure moves farther away from the center, the threat to the organization grows as performance pushes closer to and through the “edge of collapse.” The very outer ring is system collapse or failure. Any one of these three crucial necessities pushed too far outward will cause an organization to fail.
FIGURE 1-1 The strategic target chart
The black dots in Figure 1-1 represent the organization’s position for each critical consideration. Conceptually, these dots will never touch. If they are consistently green, the organization and its expectations grow; the circle (and its rings) simply expands outward. Additionally, there are lines connecting the black dots depicting the tension and connections between the three areas. For example, if the customer base erodes, contribution margin and working capital will be adversely affected. If contribution margin erodes, working capital will be adversely affected.
When any one of these considerations moves into the edge of collapse ring, signal strength will intensify, and the organization will call, “All hands on deck!” to deal with that specific threat. However, there is a strong connection and tension among the three. Organizations must be careful not to overcompensate in any one area in a manner or for a duration that might drive another over the edge instead. For example, to recover acceptable customer base, the decision could be made to dramatically reduce price then affecting the contribution margin. Management must constantly fight this battle in the current highly complex and volatile environment, now and in the future—that is their primary job!
A non-business analogy is the human body, a highly complex system that must be able to perform three basic functions. The human body must be able to perform respiration (draw breath and pass oxygen to the blood) at a sufficient rate. The body then must also be able to circulate oxygenated blood throughout the body in a constant loop (pulse and blood pressure). Finally, the body must be able to maintain a fairly tight control zone of temperature or risk vital organ failure. These three basic functions essentially define what is known as the “vital signs”.
The green zone centers for each of these vitals is well known throughout the medical community and will depend on certain patient characteristics such as age and sex. These green zones are defined below by the Cleveland Clinic.5
Any person that exhibits increasing difficulty with any one or a combination of these vital functions will be at an increasing risk of expiring. If that person was at a hospital during that difficulty there would be an escalation of monitoring,