Turbulence produces threats and opportunities. Readers will nod their head in agreement with this statement in principle. Yet when thrust into a volatile situation, most people most of the time will fixate on risks and walk right past opportunities strewn along their path.
My last post described how students analyzing the steel industry in 1999 fixated on the risks of expanding into emerging markets and overlooked the opportunities. Most steel executives during the 1990s looked at the industry with the same risk-tinted glasses, viewing every change as a threat–globalization meant low-price imports while technological innovation would disrupt their established processes. A 2002 report by the consulting firm BCG concluded that “capitalism alone cannot solve [the] problem” of chronic losses in the steel industry. The report did not once mention Lakshmi Mittal, who had created a multi-billion Euro steel empire by exploiting opportunities in the world’s most volatile markets.
A focus on the downside of turbulence extends well beyond steel. In 2009, the World Economic Forum published its most recent report on global risks, plotted by their likelihood and potential impact. These included man-made threats-such as retrenchment from globalization and international terrorism-rounded off with a host of natural disasters reminiscent of biblical plagues, including droughts, cyclones, earthquakes, and flooding. Only a single item on their list–nanotechnology–lent itself to a positive spin. Even there, the authors framed it in negative terms as the “emergence of nanotechnology risks.”
Some people believe the human mind is wired to see threats in volatile circumstances. This is nonsense. We obsess about threats out of habit, not genetics. When working with executives, I often ask them to list as many threats emerging from the current economic crisis as they can jot down in one minute. On average, they write down five to seven threats. I then give them the same amount of time to jot down the opportunities emerging out of the crisis. Typically, they write as many opportunities as threats. It is not that they cannot spot opportunities in turbulence, it is that they are not asked to do so.
We can chose to frame turbulence as a source of threats, opportunities, or both. And that choice matters. Framing change as a threat helps to mobilize the resources required for action. In a study of newspapers’ response to the Internet, Professor Clark Gilbert found that most newspaper executives ignored the Internet until the late 1990s. When they finally took notice, they framed the new technology not as a brilliant tool to disseminate news, but as a threat to their advertising and subscription revenues. Most newspapers then embarked on crash-course efforts to build an online presence. Despite mounting losses in their online businesses, print executives doubled investments annually, hurling money, people, and attention at the new business in an effort to protect profitability.
Framing change in negative terms gives rise to a response known as “threat rigidity,” that includes a contraction of authority, reduced experimentation, and focus on existing resources. Gilbert’s study documented all three dysfunctions of threat rigidity. In the newspapers he studied, a handful of corporate executives called the shots in the online businesses, in contrast to the decentralized approach they followed in other units. Senior executives dictated templates for sales, business model and product development that limited scope for experimentation.
The rapid influx of resources, moreover, prevented managers from experimenting on a small scale before growing the business. They scaled up the online businesses before working out the kinks. Finally, the newspapers replicated existing resources online. More than 85% of the newspapers’ web content rehashed articles from the paper, while they ignored features including social networking, online auctions, or breaking news from third parties, that were not part of their traditional print offering.
Turbulence produces not only risks, but also opportunities, and fixating on risk obscures the upside of turbulence. When the government of Kazakhstan decided to privatize its largest steel mill, officials invited executives from U.S. Steel to conduct exclusive due diligence on the plant and the affiliated operations. The Kazakh officials believed that U.S. Steel executives–with nearly a century of experience running large plants and dealing with local communities–were uniquely well-positioned to see the mill’s potential. The U.S. Steel team saw only risks, however, and passed on the acquisition. Mittal, in contrast, pounced.
Of course, the world faces real challenges, but framing them as threats is not necessarily the best way to address them. In his 1968 book The Population Bomb, Stanford professor Paul Ehrlich analyzed the warfare, political unrest, and famine embroiling the Indian subcontinent, and predicted that the “the battle to feed all of humanity is over… In the 1970s and 1980s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now…India couldn’t possibly feed two hundred million more people by 1980.”
Peering into turbulence, Ehrlich saw only famine and war. Meanwhile, the plant geneticist Norman Borlaug stared into the same future, and glimpsed an opportunity. Borlaug, who died earlier this year, bred high-yield disease-resistant wheat. His strain helped India and Pakistan to double wheat production between 1965 and 1970, become self-sufficient in food, and avoid widespread starvation. Borlaug won the Nobel Peace Prize, while Ehrlich removed his prediction from later editions of his book.
My next post explains how turbulent markets generate opportunities.