3 Crucial Challenges that are Shaping the Future of Business

The future, to borrow a phrase, ain’t what it used to be.

When Marshal McLuhan predicted that electronic media would create a Global Village, he foresaw a new reality where old assumptions would no longer apply; barriers would be broken down and human creativity unleashed.  It’s clear that he was on to something.

Here are three key domains that are driving the transformation:

Chaos, Turbulence and the End of Business Statistics

Statistics have, to a large extent, defined business thinking over the last few decades.  In the 1970’s, mathematical wizards created econometric tools such as the Capital Asset Pricing Model (CAPM) and Black Scholes in order to allocate resources, manage risk and guide strategy.

As Nassim Taleb has so enthusiastically pointed out, these models have failed us.  It’s not hard to see why.  The basic assumption, that events are independent, was always problematic and is becoming even more so in an interconnected world.   While the models perform reasonably well most of the time, they  drastically undercount extreme values.

For example, theory predicts that a daily fluctuation in the stock market of 7% should only happen once every 300,000 years, that’s about as close to a sure bet as you can imagine.  However if you bet the farm on that assumption, you would have lost it 48 times over the last 100 years.

Moreover, the under-counting goes both ways.  Not only are enormous downside risks miscalculated, so are fantastic opportunities.

The Emerging Science of Networks

While social media has been getting most of the attention, it is social networks that we really need get hold of.  As we are becoming increasingly interdependent, it is becoming crucial to better understand how those connections work.

Much like chaos, network science is upending old ideas about how we should evaluate markets, target consumers and run organizations.  New types of business analysis, not surprising based on the same underlying math as chaos, are still primitive, but powerful nonetheless.

Moreover, network science isn’t just limited to people.  It is being applied to cancer research, ecological systems and electrical grids.  Anywhere things connect, network theory is being employed.

The Semantic Web and The Web of Things

The web, as we know it, pertains to documents.  We browse web pages which contain text, pictures and even video.  That in itself was revolutionary.   However, as Tim Berners-Lee says “It isn’t the documents which are actually interesting, it is the things they are about!”

The Semantic Web, which uses meta tags to allow computers to communicate with each other directl, is the next frontier.  The power to effectively combine databases will revolutionize how we manage supply chains, design products and research opportunities.

Increasingly, the semantic web is becoming a web of things, where not only documents and databases are connected, but electronic components and appliances as well.  We are not only becoming more attached to our devices, but they are becoming more intertwined with each other.

Of course, the new semantic technologies are creating even greater interdependence, which is driving chaos and a more networked world.

How to Meet the Challenges of Turbulence and the Networked World

In the old business environment, we would routinely make assumptions that are becoming less and less tenable.  Organizations, industries and societies used to be isolated enough that we could take a reductionist approach.  Statistical techniques were, for the most part, effective because they were right more than they were wrong.

A more turbulent world raises the stakes because a wrong assumption, if left to its own devices, can wreak havoc.  Whole industries can be torn apart and, as recent events have shown, even the world economy itself can be laid asunder.  We need to re-examine what we thought we knew.

Here are some strategies to cope with the chaos:

Believe in Luck: Conventional analysis only takes into account what we already know.  Breakthrough ideas and disastrous events, almost by definition, are in the realm of the unknown and unexpected.  It’s no longer safe to extrapolate from past experience.  No one knew that they wanted an i-Pod until they actually saw one.

Luck, which is really just another word for things we don’t understand, increasingly must be taken into account.  LTCM, a hedge fund run by Nobel prizewinning economists, lost hundreds of billions of dollars because they didn’t account for bad luck.  They expected the future to follow the past.

From a marketing standpoint, it makes even more sense to account for luck.  Companies like Microsoft, Google and Apple routinely invest in untested technologies for exactly that reason.  Betting only on sure things is a sure path to mediocrity.

Search Weak Links: In the old business environment, it was enough to listen to customers.  These days, you need to know what’s going on several degrees of separation away: your customers’ customers’ customers.

One who understood this better than most was Richard Feynman. He would explore domains far away from his specific area of quantum physics and in doing so pioneered new fields such as nanotechnology and quantum computing.

Admit You Don’t Know and Give Up The Illusion of Control: Risk management in the 21^st century is becoming less mathematical and more judgmental.  Great businesses are built not through strategic integrity, but through transcending domains.  Paradigms are no longer switched as much as they are merged together.

The old statistically driven business world was built on false certainty and control.  It worked well enough when things moved slower and mistakes were punished less harshly.  Markets today aren’t so forgiving.

Build Extended Competencies: In 1990, Hamel and Prahalad suggested that corporations were defined by their core competencies (pdf) .  Today, companies are dependent on their extended competencies: those of their partners, supplies and customers.

This last point is probably the most important, because interconnectivity goes both ways.  Not only can seemingly distant events affect us, but we also touch our environment to a greater extent than we ever did.

Even in a web of documents, databases and things it’s still people that make the difference.