Leadership And Complexity
 

Leadership And Complexity

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Countries, Industries and Organisations are operating in an increasingly complex word where interdependencies abound. Under these conditions Leadership faces enormous challenges and strategising has ...

Countries, Industries and Organisations are operating in an increasingly complex word where interdependencies abound. Under these conditions Leadership faces enormous challenges and strategising has to be done on the edgfe of chaos.

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Leadership And Complexity Leadership And Complexity Presentation Transcript

  • BMI CENTRE FOR STRATEGY, LEADERSHIP- AND ORGANISATIONAL- REINVENTION www.strategicforum.co.za Towards making sense Complexity science implications for Leadership, Business and Industry Leaders make the impossible happen Dr. Llewellyn B. LewisLC1 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY www.leadershipreinvention.co.zaLC2 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY www.strategicforum.co.za The pace of change has accelerated way beyond the comfort zone of most people The rules that guided decisions in the past, are no longer reliable The elements of change that are driving these momentous shifts, are based on the fundamental dimensions of the universe itself. Time, space and mass (Stan Davis : 2001)LC3 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY www.strategicforum.co.zaLC4 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY www.strategicforum.co.za Connectivity is putting everyone and everything on-line in one way or another and has led to the death of distance, a shrinking of space. Intangible value of all kinds like service and information, is growing explosively, reducing the importance of tangible mass. Connectivity, Speed and Intangibles – the derivatives of time, space and mass – are blurring the rules and redefining our businesses and our lives. What we see is a melt-down of all traditional boundaries. (Stan Davis : 2001)LC5 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Since the economy and business are part of the universe, time, space and mass are the fundamental dimensions of them as well. Until recently, this notion was too abstract to be very useful. Now we are realising the extraordinary power this insight has to the business world. Almost instantaneous communication and computation are shrinking time and focusing us on speed. (Stan Davis : 2001)LC6 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Chaos Complexity Diversity Strange Attractors Emergence Self Organisation Critical Mess Order for Free The Butterfly effect Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000)LC7 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Since the time of Newton, Bacon and Descartes, scientists have tended to understand the natural world in terms of machine-like regularity in which given inputs are translated through absolutely fixed laws into given outputs Cause and effect are related in straightforward linear ways According to this Newtonian view of the world, humans will ultimately be able to dominate nature This whole view of reasoning and understanding was imported into economics, social sciences and psychology (Source: Based on Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC8 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY This importation is the source of the stable equilibrium paradigm that still dominates thinking on managing and organising That thinking is based on the belief that managers can in principle control the long-term future of the system Such belief is realistic if cause-and-effect links are of the Newtonian type, for then the future of the system can be predicted over the long-term and its future can be controlled by someone. (Source: Based on Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC9 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Chaos exists outside abstract mathematical equations, for example the world’s weather system The weather is patterns in interdependent forces such as pressure, temperature, humidity and wind speed that are related to each other by non linear relationships To model its behaviour, the forces have to be measured at a particular point in time, at regular vertical intervals through the atmosphere from each of a grid of points on the earth’s surface (Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC10 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Rules are then necessary to explain how each of the sets of interrelated measurements, at eachmeasurement point in the atmosphere, move over time This requires massive numbers of computations When these computations are carried out they reveal that the weather follows what is called a strange attractor, another name for a chaotic pattern. What this shape means is that the weather follows recognisably similar patterns, but those patterns are never ever exactly the same as at any previous point in time(Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC11 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY Chaotic dynamics means that humans will never be able to forecast the weather at a detailed level for more than a few days ahead. The theoretical maximum for accurate forecasts is two weeks, which meteorologists are nowhere near reaching yet The reason for no two snowflakes ever being the same can be explained using chaotic dynamics One of the most intriguing discoveries is that healthy hearts and healthy brains display mathematical chaos (Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 261)LC12 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY The heart moves into regular rhythm just before a heart attack and brain patterns during epileptic fits are also perfectly regular It seems that chaos is the signature of health The properties of low dimensional deterministic chaos have been applied to non linear feedback systems in meteorology, physics, chemistry and biology Economists and other social scientists have been exploring whether these discoveries are relevant to their disciplines (Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC13 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY THE NOBEL PRIZE: 2005LC14 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITYLC15 ©BMI-CSLOR
  • THE LANGUAGE OF COMPLEXITY There are indications that chaos explanations give insight into the operation of foreign exchange markets, stock markets and oil markets (Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC16 ©BMI-CSLOR
  • LEADERSHIP AND COMPLEXITY THE EDGE OF CHAOS SECOND CURVE COMPLEXITY CREATING THE FUTURE FIELD THEORY ZONE OF CREATIVITY IMPOSSIBLE RESULTS AND ADAPTABILITY THE BUTTERFLY EFFECT ENVIRONMENTAL CHANGE EMERGENCE STRANGE ATTRACTORS RISK CRITICAL MESS RUDE AWAKENING CHAOS UNCERTAINTY FIRST CURVE SELF-DIRECTED TRANSFORMATIONLC17 (Based on Handy : 1994) ©BMI-CSLOR
  • LEADERSHIP AND COMPLEXITY YOUNG PRIME MATURE DEMISE (Source: Johnson and Scholes: 2002) High YOUNG PRIME (Development, Growth) (Shakeout)DIFFERENTIATION (Source: Based onCan recognise new things Wind and Crook: 2005) DEMISE MATURE (Decline) (Maturity) Low Low HighLC18 INTEGRATION – Have capabilities, can do things ©BMI-CSLOR
  • LEADERSHIP AND COMPLEXITY The danger for mature individuals is that they will miss changes in the environment because all new information will be force-fitted into the old model. With maturity comes considerable experience and a vast mental model repertoire, which are both a blessing and a curse. Demise follows when the ability to get things done diminishes and new things are increasingly difficult to handle. Individuals have little choice but to follow this path from youth to demise in their many consistently physical development, although reinvent themselves to stay young in their thinking. (Source: Based on Wind and Crook: 2005)LC19 ©BMI-CSLOR
  • TWO PARADIGMS OF BUSINESS UNIVERSAL BUSINESS RE-INVENTION BUSINESS PARADIGM PARADIGM Newtonian Mechanics Quantum Physics Linear thinking Non Linear, organic and complex adaptive system Mechanistic Systems theory, Chaos theory, Cause and effect Complexity Science Action and reaction Influence, rather than control Centralised Control Emergent teams, self selected and Hierarchical structure self organised Job titles and job descriptions Uncertainty, limited ability to predict Predictability A WORLD MADE UP OF A WORLD MADE UP OF THINGS RELATIONSHIPS WITH INFINITE WITH FINITE POSSIBILITIES POSSIBILITIES (Based on Lewin and Regine : 1999)LC20 ©BMI-CSLOR
  • THE WORLDS OF HORUS* AND SETH* INDUSTRIAL AGE CULTURE INFORMATION AGE “SPIRIT” IN THE AGE OF HORUS* IN THE AGE OF SETH* Learn a skill Lifelong learning Security Risk-taking Job preservation Job creation Capital equipment Intellectual capital Status quo Speed and change Hierarchical and regulated Distributed and networked Zero sum Win-win Measure inputs Measure outputs * Horus, the god of structure and predictability. Seth, the god of chaos and disorder. Even thousands of years ago, the conflict between order and chaos, and the dilemmas created for those in authority, were well recognised.LC21 (Grulke : 2000) ©BMI-CSLOR
  • THE WORLDS OF HORUS* AND SETH* “ In a very real sense, today’s business executive is in the same position as that stone pharaoh. Everything we have been taught about business was crafted in the Industrial Age - in an economy where central authority, predictability and control were the touchstones.” (Grulke : 2000)LC22 ©BMI-CSLOR
  • THE WORLDS OF HORUS* AND SETH* “ The unwieldy corporate cultures of the Industrial Economy are rapidly being replaced by a kind of team spirit especially suitable to the new eCommerce organisations of today - swift, nimble and driven by almost religious visions of the future - “Don’t look for profits here, we want to change the world!”” (Grulke : 2000)LC23 ©BMI-CSLOR
  • ECONOMY IN TRANSITION INDUSTRIAL ECONOMY INFORMATION ECONOMY RESOURCES RESOURCES Raw Materials Information Real Estate Knowledge Cheap Labour Skills and Ideas THE INDUSTRIAL ECONOMY HAS BEEN WITH US FOR HUNDREDS OF YEARS. OUR FOREFATHERS COULD BE BORN INTO THIS ECONOMY, THRIVE IN IT AND RETIRE IN IT WITHOUT EXPERIENCING SUBSTANTIAL CHANGE. THE NEW INFORMATION ECONOMY, DRIVEN BY COMMUNICATIONS ANDCOMPUTER TECHNOLOGIES, HAS BROUGHT MORE ECONOMIC TRANSFORMATIONIN THE PAST DECADES THAN THE INDUSTRIAL ECONOMY BROUGHT IN THE PAST CENTURIES. THE INFORMATION ECONOMY WAS BUILT ON THE SUCCESSES OF THE INDUSTRIAL ECONOMY, AND THEN LEAP-FROGGED THE ECONOMIC IMPACT. (Grulke : 2000)LC24 ©BMI-CSLOR
  • LEADERSHIP IN TRANSITION INDUSTRIAL AGE INFORMATION AGE Knowledge Skills Experience Attitude Management Leadership THE NEW JOBS DEMAND THE ABILITY TO APPLY KNOWLEDGE IN THE FORM OF SKILLS.EXPERIENCE HAS CONTINUALLY LESS VALUE AS THE PACE OF CHANGEINCREASES - ONLY THE RIGHT ATTITUDE TO UN-LEARN AT EVERY STEP OF THE WAY WILL WIN THE DAY. IN A FRACTAL BUSINESS NETWORK THERE ARE FEWER MANAGEMENT JOBS AND GREATER DEMAND FOR LEADERSHIP AT ALL LEVELS. (Grulke : 2000)LC25 ©BMI-CSLOR
  • LEADERSHIP REINVENTION The move from the “control” model, that comes down almost unchanged from Moses, in the hierarchic principle, toward the “servant” model, begins with cultivating the attitudes that will permit the shift from coercion and manipulation to persuasion as the the predominant modus operandi in institutions generally. “I believe that caring for persons, the more able and the less able serving each other, is what makes a good society.” (Robert K. Greenleaf : The leader as servant : 1998) “Whoever would be great among you must be your servant, and whoever would be first among you must be your slave” (Matthew 20 : 26,27)LC26 ©BMI-CSLOR
  • LEADERSHIP REINVENTION DOERS AND DREAMERS SHAKERS AND MOVERS CHANGE AGENTS TRANSFORMATIONAL CATALYSTS ROMANTIC TRANSFORMATIONAL Passion, Charisma and REINVENTION DREAMERS LEADERS (MOVERS) Dreams Creating context Disturbing the status quo Focus on Being (Transformation) Paradigm shift Paradigm reinvention Impossible results Not possible results PRACTICAL SUPERMAN(AGER)S DOERS (SHAKERS) Routine tasks Developing Vision, Setting goalsBEING Following orders Focus on Doing (more, better, faster) Paradigm enhancement Paradigm pioneering Stretch results Possible results DOING LC27 Processes, Policies and Business Detail ©BMI-CSLOR
  • LEADERSHIP REINVENTIONUNIVERSAL HUMAN The Great Exchange PARADIGM FOCUS ON DOING REINVENTION MASTER PARADIGM FOCUS ON BEINGLC28 (Based on Treat : 1999) ©BMI-CSLOR
  • LEADERSHIP REINVENTION The Great Exchange CURRENT KNOWN WORLD FUTURE UNKNOWN WORLD (“The Wilderness”) (“The Promised Land”) Pull of the Past Challenge of the Future Slavery Freedom Day to Day issues Dreams and Visions Satisfied with Mediocrity Striving for Excellence Surviving Thriving Conformity Transformation Grasshopper Paradigm Eagle Paradigm Paradigm Paralysis Paradigm ReinventionLC29 (Based on Treat : 1999) ©BMI-CSLOR
  • LEADERSHIP REINVENTION The Great Exchange CURRENT KNOWN WORLD FUTURE UNKNOWN WORLD (“The Wilderness”) (“The Promised Land”) Pull of the Past Challenge of the Future Slavery Freedom Day to Day issues Dreams and Visions Satisfied with Mediocrity Striving for Excellence Surviving Thriving UNIVERSAL HUMAN PARADIGM REINVENTION MASTER PARADIGM Conformity Transformation FOCUS ON DOING FOCUS ON BEING Grasshopper Paradigm Eagle Paradigm Paradigm Paralysis Paradigm ReinventionLC30 (Based on Treat : 1999) ©BMI-CSLOR
  • LEADERSHIP REINVENTION The Great Exchange CURRENT KNOWN WORLD FUTURE UNKNOWN WORLD (“The Desert”) (“The Promised Land”) Thomas Kuhn found in his study of scientific revolutions that you can’t convince the protectors of the old paradigm with better arguments. The reality is that you have to wait until the establishment scholars finally retire from their positions and are replaced by a younger and more open generation of scientists. (Senge, Scharmer, Jaworski and Flowers: 2005)LC31 ©BMI-CSLOR
  • LEADERSHIP REINVENTION The Great Exchange CURRENT KNOWN WORLD FUTURE UNKNOWN WORLD (“The Wilderness”) (“The Promised Land”) No one wants to die. Even people who want to go to heaven don’t want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because death is very likely the single best invention of life. It is life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of other’s opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary. (Steve Jobs, graduation address at Stanford University : 2005)LC32 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY Ahead of the Change Curve Transformation or REINVENTION Strategic Drift Behind the Change Curve Demise (Source: Based on Johnson and Scholes: 2002)LC33 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY WATCH A FLOCK OF GEESE TURNING and swooping in flight, undeterred by wind, obstacles and distance. There is no grand vizier goose, no chairman of the gaggle. They can’t call ahead for a weather report. They can’t predict what obstacles they will meet. They don’t know which of their number will expire in flight. Yet their course is true. And they are a flock. Complexity theorists describe this, and the many other examples of spontaneous harmony in the world around us, as order without careful crafting or order for free. (Gary Hamel : 2000)LC34 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY The intricate play of the many markets that make up the global economy,the vibrant diversity of the Internet, the behaviour of a colony of ants, that winged arrow of geese - these are just a few instances in which order seems to have emerged in the absence of any central authority.All of them have something to teach us about how revolutionary strategies should emerge in a chaotic and ever- changing world. Complexity theorists have demonstrated that by creating the right set of preconditions, one can provoke the emergence of highly ordered things maybe even things such as revolutionary business concepts. (Gary Hamel : 2000)LC35 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY In one of the earliest models developed by complexity theorists, Craig Reynolds discovered that the complex behaviour of such a flock of geese emerges from a few simple rules of individual behaviour. Wryly, he called his computer simulation BOIDS. In the model each BOID obeys three rules : Fly in the direction of other boids; Try to match the velocity of adjacent boids; Avoid bumping into things.LC36 (Lewin and Regine : 1999) ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY The simulation begins with the boids placed randomlyin space, but very quickly the individuals form themselves into a flock that behaves just like real birds, wheeling and turning together and avoiding obstacles in their path. The point is that the complex behaviour of the systemas a whole - the coordinated motion of the flock - emerges from a few simple rules of interaction among individuals, not from a single leader. This has been called “distributed control”, in contrastwith central control, which is what many CEO’s usually try to achieve when they follow a mechanistic model of management.LC37 (Lewin and Regine : 1999) ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY This process is known as “emergence”. In nature an ant colony is a complex adaptive system. Individual ants interact in a few simple ways, following simple rules of signals and behaviour : “danger, come quickly”, “food, follow me”, or “I am a nest mate, not an alien”. FROM THESE SIMPLE RULES EMERGES A COMPLEX NEST ARCHITECTURE, A COMPLEX SOCIAL DYNAMIC, AND EVEN PROPERTIES SUCH AS TEMPERATURE AND HUMIDITY CONTROL WITHIN THE COLONY. YET NONE OF THE EMERGENT FEATURES CAN BE PREDICTED BY KNOWING HOW INDIVIDUAL ANTS INTERACT.LC38 (Lewin and Regine : 1999) ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY (Source: Johnson and Scholes: 2002)LC39 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY (Source: Johnson and Scholes: 2002)LC40 ©BMI-CSLOR
  • BUSINESS AND COMPLEXITY PARADIGM SHIFT IN THE WORLD OF BUSINESS : A shift from viewing the world as simple, predictable and settling to equilibrium TO acknowledging that it is complex, unpredictable and far from equilibriumLC41 (Lewin and Regine : 1999) ©BMI-CSLOR
  • BUSINESS REINVENTION The danger for mature Organisations is that they will miss changes in the environment because all new information will be force-fitted into the old model. With maturity comes considerable experience and a vast mental model repertoire, which are both a blessing and a curse. Demise follows when the ability to get things done diminishes and new things are increasingly difficult to handle. Organisations generally react to a perception that they are headed into decline by attempting to reinvent themselves and bring in new leadership. (Source: Based on Wind and Crook: 2005)LC42 ©BMI-CSLOR
  • BUSINESS REINVENTIONLC43 ©BMI-CSLOR
  • BUSINESS REINVENTION TOKYO — Sony named the British-born head of its US operations, Howard Stringer, as its new chairman and CE, handing the reins of the struggling Japanese electronics maker to a foreigner for the first time. “The world is simply not the same place it was a few years ago. The needs and expectations of our customers have changed,” Stringer said at a briefing. “So, Sony too, must reinvent itself.”LC44 ©BMI-CSLOR
  • BUSINESS REINVENTION UNIVERSAL BUSINESS RE-INVENTION BUSINESS PARADIGM PARADIGM Newtonian Mechanics Quantum Physics Linear thinking Non Linear, organic and complex adaptive system Mechanistic Systems theory, Chaos theory, Cause and effect Complexity Science Action and reaction Influence, rather than control Centralised Control Emergent teams, self selected and Hierarchical structure self organised Job titles and job descriptions Uncertainty, limited ability to predict Predictability A WORLD MADE UP OF A WORLD MADE UP OF THINGS RELATIONSHIPS WITH INFINITE WITH FINITE POSSIBILITIES POSSIBILITIES (Lewin and Regine : 1999)LC45 ©BMI-CSLOR
  • BUSINESS REINVENTION Decreasing dependence on command-and-control type of leadership A breakdown of hierarchies An increasing commitment to virtual technologies The embracing of teamwork Greater flexibility Knowledge centres interacting largely through mutual interest and electronic - rather than authority systems Emergence of new organisational forms, including virtual enterprises - defined as small, core organisations that outsource major business functions - imaginary corporations, dynamic networks and flexible work teams. (Raghuram, Garud and Wiesenfeld : 1998)LC46 ©BMI-CSLOR
  • BUSINESS REINVENTION Boundaryless organisations in a borderless global marketplace Chain of command eliminated Limitless spans of control Departments replaced with empowered teams Vertical boundaries removed to flatten the hierarchy Horizontal boundaries removed to both replace functional departments with cross-functional teams, and organise activities around processes Boundaryless organisations break down barriers to both external constituencies and geographic distance (Based on Noble : 1996, Robbins : 1996, Raghuram, Garud and Wiesenfeld : 1996)LC47 ©BMI-CSLOR
  • ORGANISATIONAL RESPONSE (BA) As the information revolution begins to affect the nature and organisation of work as fundamentally as the industrial revolution did, there will be more pressures to redesign the actual physical surroundings. Robert Ayling, Chief Executive, British Airways. There are no lifts from the underground car-parks so that everyone has to pass through the street on the way to their work place; meeting people on the way. First names are the norm and no one stands on ceremony - you can’t The street is a real street with a café, in a village street. a bank and a branch of Waitrose where you can place your order via computer and pick it up in the car park on the way home. There are trees, a piazza and a small stream, all under a high glass canopy.LC48 ©BMI-CSLOR
  • ORGANISATIONAL RESPONSE (BA) Organisations work best if they are designed as villages. In a village you don’t learn what is going on by reading memos, you go down the street and pick up the news by bumping into people. Randomness and accidental meeting, encourages serendipity, removes the impression of hierarchy, and fosters a sense of comradeship and belonging.LC49 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The current and known world The future, unknown THE All organisations Reinventing EDGE OF CHAOS SECOND CURVE CHAOS THEORY TRANSFORMATION AND RENEWAL (Whole industry) The Industry FIELD THEORY Leadership- COMPLEXITY SCIENCE Corporate-Scope of change and Single Reinventing the Leadership Industry- transformation organisations The Organisation (Part of industry) Transformation FIRST CURVE EVOLUTIONARY CHANGE STRATEGY All processes REGENERATION (Whole company) Business process Process re-engineering simplification Single process Business and redesign (Part of restructuring company) Standing Continuous Benchmarking Best Paradigm Paradigm still Improvement Practice shift Re-invention Smaller Better Faster Different Transformed LC50 Impact of Change and transformation ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS Intuitive capacity Permeable boundariesSecond curve Creativity Emergence First curve PARADIGMSLC51 (Source: Based on Johnson and Scholes: 2002) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC52 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Hot Spots = (Cooperative Mindset x Boundary Spanning x Igniting Purpose) x Productive CapacityLC53 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYEmergence of a Cooperative Mindset depends on the attitude of Leaders towards cooperation and competition and their capacity and willingness to craft within the The energy of the cooperative mindset has to organisation a sense of mutuality and be channeled across boundaries for the congeniality. innovative capacity of a Hot Spot to emerge. Hot Spots = (Cooperative Mindset x Boundary Spanning x Igniting Purpose) x Productive Capacity These three elements have a multiplier effect on each other. Together they are capable of creating For this well of latent energy to be released energy and excitement. For this energy to be there has to be a point of ignition. This igniting channeled into productive outcomes requires the purpose, can be an igniting vision, question, or fourth element, productive capacity. This capacity is task. the extent to which members within the Hot Spot are capable of working together in a productive manner.LC54 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Designing for cooperative Practices and processes Cooperative Assumptions of Social norms cooperation Legitimisation of Cooperative Cooperative behaviour Language and habits And stories Delegitimisation of competitive behaviour and habits Emergence of a Cooperative Mindset: It starts with assumptionsLC55 (Source: Gratton: 2007) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Another version of Stakeholder analysis Confirmation Reconfiguration Innovation BER IPD Acquaintances Rode Information eProp And associates Industry Insight arbitrage Information SAPOA (weak ties) Cement and Concrete Institute SAARF SAFCEC arbitrage BMRDepth of Relationships BIFSA NHBRC SA Steel Institute CIDB BMI-BRSCU Information ABSA MFA Information Econometrix arbitrage FNB Close friends and Standard Bank Political Dynamics arbitrage Strong relationships Nedbank (strong ties) UNISA Greenwich University Exploitation Exploration Within the Group Outside the Group Extent of Boundary SpanningLC56 (Source: After Gratton: 2007) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Forms an igniting purpose can take (Based on Gratton: 2007:102)LC57 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Developing CompetitiveCan we develop deep strategic Industry Foresight and Strategic understanding of the Current Leadership as a way ofReality of the Building Industry Business Life. Environment ? Turning Data into Wisdom, Exposing Paradigm Blindspots, and challenging the Industry to REINVENT continuously. Forms an igniting purpose can take (Based on Gratton: 2007:102)LC58 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The point of inflection occurs when what has served well in the past will not serve well in the future. The challenge for executives is that many are leading companies which are themselves at a point of inflection Points of inflection in organisations: shifting from old rules to new (Gratton: 2007: 145)LC59 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Many companies are beginning to approach the At the heart of the second curve apex of the first curve, when are the rules of Hot Spots – the simply doing more of the idea that energy can be same is not increasing the ignited, that relationships and value of their companay. networks are crucial, that commitments and To do so they will have to conversations can replace rules abandon some of the old and directives. rules, and begin to build competence and energy This is no easy challenge. As around the new rules of the leaders and members of second curve. organisations, we often find ourselves at points of inflection. Those that fail to do so will see What worked in the past is a gradual but consistent not working so well anymore. decline in the capacity to create value. The context in which we work has changed fundamentally as technology joins up the world and The context in which we work has changed fundamentally as technology joins up the world and globalisation opens up new markets for capital, talent, products and services. globalisation opens up new markets for capital, talent, products and services. Points of inflection in organisations: shifting from old rules to new (Gratton: 2007: 145)LC60 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Real progress demands a revolution. You can’t shuffle your way onto the next S Curve. You have to leap. You have to vault over your preconceived notions, over everyone’s best practices, over the advice of all the experts, and over your own doubts. Many companies are Future of Management: 2008) (Gary Hamel, The beginning to approach the At the heart of the second curve apex of the first curve, when are the rules of Hot Spots – the simply doing more of the idea that energy can be same is not increasing the ignited, that relationships and value of their companay. networks are crucial, that commitments and To do so they will have to conversations can replace rules abandon some of the old and directives. rules, and begin to build competence and energy This is no easy challenge. As around the new rules of the leaders and members of second curve. organisations, we often find ourselves at points of inflection. Those that fail to do so will see What worked in the past is a gradual but consistent not working so well anymore. decline in the capacity to create value. The context in which we work has changed fundamentally as technology joins up the world and The context in which we work has changed fundamentally as technology joins up the world and globalisation opens up new markets for capital, talent, products and services. globalisation opens up new markets for capital, talent, products and services. Points of inflection in organisations: shifting from old rules to new (Gratton: 2007: 145)LC61 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The Hot Spot Scenario: mapping emergenceLC62 (Gratton: 2007: 145) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Modeling cooperative behaviour REINVENTION Information BMI ARBITRAGE Subscribers Socratic Associates Website, sharing dialogue, of ALL asking the BIG INFORMATION, questions empowering Exchanging and Cross TRANSFORMING Productive functional facts capacity Networking Data analysis, developing WISDOM The Hot Spot Scenario: mapping emergenceLC63 (Based on Gratton: 2007: 145) ©BMI-CSLOR
  • THE STRATEGIC FORUM www.strategicforum.co.za Studium Ad Prosperandum •• BUILDING RESEARCH BUILDING RESEARCH BMI BMI STRATEGY CONSULTING STRATEGY CONSULTING UNIT cc UNIT cc Voluntas in Conveniendum Reg. No. 2002/105109/23 THE STRATEGIC FORUM A place of assembly for strategic conversations Towards Making sense of the future of the Building Industry System Dr. Llewellyn B. Lewis November 2007LC64 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS Lots of Variety Ideas Many Organisations Creativity emergence Potential Permeable volatility boundaries Intuitive capacity Potential InnovationLC65 (Source: Based on Johnson and Scholes: 2002) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOSLC66 (Source: Fortune, 11 September 2006) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY “We’re willing to tolerate ambiguity THE EDGE OF CHAOS and chaos because that’s where the room is for innovation.” Eric Schmidt Sergey Brin Larry PageLC67 (Source: Fortune, 11 September 2006) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOSLC68 (Source: Fortune, 11 September 2006) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOSLC69 (Source: Fortune, 11 September 2006) ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY THE EDGE OF CHAOSLC70 (Source: Fortune, 11 September 2006) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Chaos Edge of Chaos Structure The Edge of Chaos Past Present Future The Edge of TimeLC71 (Source: Brown and Eisenhardt: 1998) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS New order can emerge from chaos. Complexity theory argues that nothing innovative can emerge from systems with a high degree of order and stability (eg Chaos Edge of Chaos regulated industries); Structure similarly, completely chaotic The Edge of Chaos systems (eg riots) are incapable of functioning or creating anything. Somewhere on the boundary Present between order and disorder, Past Futureand chaos, sits control creativity, innovation, self- renewal and growth. The Edge of Time Pascale (1999) calls this point “the edge of chaos”. (OUBS, Strategy: Unit 8: 28)LC72 (Source: Brown and Eisenhardt: 1998) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Competing on the edge rests on the assumption that the marketplace is in constant flux. The assumption of static equilibrium no longer applies. Rather the view is that competitors come and go. Markets emerge, close, shrink, split, collide and grow. Today’s collaborators are tomorrow’s competitors . . . or both. Technology is constantly shifting. Getting to the market early matters. In complexity parlance, the marketplace is a continuously deforming landscape. The image of this kind of landscape is of a terrain richly contoured by peaks and valleys. And it is continuously reshaped by warp- speed change.LC73 ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS The second assumption is that firms are composed of numerous parts or agents, or businesses. When these parts are linked together at the edge of chaos and time, they form complex adaptive systems. These systems are complex not because they are complicated. They are actually fairly simple. Rather, “complex” describes the complicated, innovative and self- organised behaviour that emerges from them. They are adaptive because they can change effectively.LC74 ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS The key assertion is that successful firms in fiercely competitive and unpredictably shifting industries pursue a competing on the edge strategy. The goal of this strategy is not efficiency or optimality in the usual sense. Rather, the goal is flexibility – that is adaptation to current change and evolution over time, resilience in the face of setbacks, and the ability to locate the constantly changing sources of advantage. Ultimately it means engaging in continual reinvention.LC75 ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOSLC76 (Source: Brown and Eisenhardt: 1998) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Roll out new branches, source and develop new products, develop new markets, discover new customers, diversify. LEADING CHANGE. Building BlocksLC77 (Source: Brown and Eisenhardt: 1998: 23) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Entrepreneurial and Simple rules, creative, visionary Influence rather than control, thinking, possibility and Flat structure, abundance, continuous Strategic Conversations, learning, COMMUNICATION Emergent teams, self selected and self- Navigating the Edge of Chaos: Improvisation organised, emergent strategy (Source: After Brown and Eisenhardt: 1998: 47)LC78 ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Industry Knowledge,Networking, teamwork, Local autonomy, alliances, joint decentralised, distributedventures, partnerships power. Rapid response, Flexibility, Co-adaptation Leveraging strategic capability, Unique resources, core competenciesLC79 (Source: After Brown and Eisenhardt: 1998: 80) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Simultaneous first and second Respect experience; curve thinking; Win-win relationships; Leveraging core Redefine the boundaries, change the game competencies across rules, reconfigure the value chain. Business Units. Protect and build; Product enhancement; Regeneration market penetration; Create services that exploit change.LC80 (Source: After Brown and Eisenhardt: 1998: 114) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS Strategise to intercept the future, Creativity and innovation; Market development, product explore opportunities within development, diversification. context of strategic intent Exploring the future, emerging strategy, Experimentation Reinvention and transformationLC81 (Source: After Brown and Eisenhardt: 1998: 149) ©BMI-CSLOR
  • COMPETING ON THE EDGE OF CHAOS The ever renewing organisation (or society) is not one which is convinced that it enjoys eternal youth. It knows that it is forever growing old and must do something about it. It knows that it is forever producing deadwood and must, for that reason, attend to its seedbeds. The seedlings are new ideas, new ways of doing things, new approaches. (Gardner: 1981: 68)LC82 ©BMI-CSLOR
  • THE GLOBAL PROPERTY INDUSTRY Emergent Global Property market Local Interaction, local knowledge (Source: Based on Roger Lewin. Complexity. Life at the edge of chaos: 1999)LC83 ©BMI-CSLOR
  • THE PROPERTY MARKET AND COMPLEXITY Emergent Global Property market Local Interaction, local knowledge (Source: Based on Roger Lewin. Complexity. Life at the edge of chaos: 1999) BMI-BRSCULC84 ©BMI-CSLOR
  • THE PROPERTY MARKET AND COMPLEXITY Not imposed by any one guru or institution Emergent or government. Global Property The result of the market individual choices of millions of people world-wide. Characteristics of WISE CROWDS: 1. Diversity of opinion (each person has some private information, even if it is just an eccentric interpretation of the known facts); 2. Independence (people’s opinions are not determined by the opinions of those around them); 3. Decentralisation (people are able to specialise and draw Local Interaction, local knowledge on local knowledge); 4. Aggregation (some mechanism exists for turning private judgements into a collective decision). (James Surowiecki: 2004) (Source: Based on Roger Lewin. Complexity. Life at the edge of chaos: 1999) BMI-BRSCULC85 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY There are indications that chaos explanations give insight into theoperation of foreign exchange-, stock- and oil-markets(Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC86 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC87 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC88 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC89 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC90 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYLC91 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY There are indications that chaos explanations give insight into the operation of foreign exchange-, stock- and oil-markets (Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259) We deduce that it can be used to explain the dynamics of the Property Market Inter alia, that it is a deterministic non linear system in a stage of bounded instability displaying highly complex behaviour It is in a border area between stable equilibrium and explosive instability; i.e. a state of paradox in which two contradictory forces, stability and instability are operating simultaneouslyLC92 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITYUNDERSUPPLY 2007Demand exceeds supplyPrices increase SA RES PROPERTY MARKETBuyer resistance develops MIH RHMarket tightens LH AH Tightening Market BTLDemand and Supply EquilibriumOVERSUPPLY 2012?Supply exceeds demand Legend:Competition increases AH - Affordable HousingPrices moderate Loosening Market MIH - Middle Income HousingMarket loosens LH - Luxury Housing RH - Retirement Housing BTL – Buy to Let Market 1999LC93 ©BMI-CSLOR Source : Based on Viruly
  • INDUSTRY AND COMPLEXITY When the system operates in the border between stability and instability, its behaviour unfolds in so complex a manner, so dependent on the detail of what happens, that the links between cause and effect are lost. One can no longer count on a certain given input leading to a certain given output The longterm future of such a system is not simply difficult to see: it is for all practical purposes unknowable (Source: Based on Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC94 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The consequence is that any decision-making process that forecasting, envisioning future involves states, or even making any assumptions about future states, would be ineffective One would have to rely instead on using qualitative patterns to reason by analogy and intuition Those who succeed in the borders between stability and instability would be those who see patterns where others search for specific links between causes and events. (Source: Based on Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000: 259)LC95 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The current and known world The future, unknown All Countries (Whole World) THE GLOBAL PROPERTY ENVIRONMENTScope of change and Single transformation Country (Part of World) Critical mass of LIMITS TO GROWTH DEMISE Investors PARADIGMS THE (Whole CHALLENGED community) PROPERTY ALTERNATIVE BUBBLE? Single INVESTMENTS Investor (Part of community) THE LOCAL PROPERTY MARKET Paradigm Early Bandwagon Late Pioneer adopter Flocking Adopter Herd behaviour LC96 Impact of Change and transformation ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The current and known world The future, unknown IMF All Countries World (Whole World) BankScope of change and Single Ministry transformation Country Treasury (Part of World) Critical mass of LIMITS TO GROWTH DEMISE Banks Investors PARADIGMS Public THE (Whole CHALLENGED opinion community) PROPERTY ALTERNATIVE BUBBLE? Single INVESTMENTS Investor Individual (Part of community) THE LOCAL PROPERTY MARKET Paradigm Early Bandwagon Late Paradigm Pioneer adopter Flocking Adopter shift Herd behaviour LC97 Impact of Change and transformation ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY The current and known world The future, unknown THE All Countries EDGE OF CHAOS (Whole World) CREATIVITY REINVENTION INNOVATION • Structural Change?Scope of change and Single • Self Organisation transformation Country (Part of World) • Order for Free! • Property a preferred Critical mass of LIMITS TO GROWTH Investment! Investors PARADIGMS (Whole CHALLENGED community) ALTERNATIVE Single INVESTMENTS Investor (Part of community) THE LOCAL PROPERTY MARKET Paradigm Early Bandwagon Late Paradigm Paradigm Pioneer adopter Flocking Adopter shift Re-invention Herd behaviour LC98 Impact of Change and transformation ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Is the Reserve Bank in Control of the System? It was an old Federal Reserve chairman who said that it is a central bank’s task to take away the punchbowl just as the party starts to get lively. (Cees Bruggemans, Chief Economist, FNB, 6 December 2004)LC99 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Is the Reserve Bank in Control of the System? In both the UK and Australia, the reserve bank raised interest rates specifically to target house prices, because of bubble conditions that have developed there. (Chris Hart, Chief Economist, ABSA, 17 September 2004)LC100 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Is the IMF in Control of the System? The International Monetary Fund (IMF) urged the Bank of England to raise interest rates to avert the possibility of a crash in house prices. It also warned about the risks posed by high levels of household debt, saying, the main risk to the outlook is the possibility of an abrupt correction in the housing market. (The Telegraph, London, 25 April 2004)LC101 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Truth be told No one Is in control of the system!LC102 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY Truth be told But . . . There are No one Important Influencers Is in control of and the Influences system!LC103 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCER PROGNOSIS ON THE PROPERTY MARKET: ALAN GREENSPAN “The housing market will inevitably cool down and prices may even decline.” (28 August 2005)LC104 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCER PROGNOSIS ON THE PROPERTY MARKET: ALAN GREENSPAN • “By far the majority of homeowners have built up a considerable value cushion which can absorb a reduction in house prices.” • “The increase in the buying and selling of second homes indicates that speculation has played a larger role in the recent house price increases than before.” • “Some 80% of the increase in mortgage advances are people that have borrowed on the value of their homes.” (28 September 2005)LC105 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCERS Borrow for that dream house at your own risk. That’s the message from economists who are alarmed at runaway mortgage lending and worry that Reserve Bank governor Tito Mboweni might apply gentle brakes soon in the form of an interest rate hike. Optimists point out that CPIX inflation has languished for two years within the 3%-6% target range, South Africans’ debt burden remains low by historical and international standards and low interest rates mean there is little problem with financing this debt. But the pessimists say: “Tell Tito that”. He may have been a tad alarmed by the money supply and credit growth figures for August that the Bank released on Friday morning. (Moneyeb, 30 September 2005)LC106 ©BMI-CSLOR
  • INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCES The IMF finds that, even though housing is not traded internationally, house prices are highly synchronized across industrial countries. An important implication of these findings is that, just as the current upswing in house prices has been a global phenomenon, any downturn is also likely to be highly synchronized across countries, with corresponding implications for the world economy. One possible factor triggering a house price downturn is the tightening of monetary policy across industrial countries as inflationary pressures emerge. (World Economic Outlook, Washington DC, 15 September 2004)LC107 ©BMI-CSLOR
  • INDUSTRY REINVENTION The current and known world The future, unknown All organisations (Whole industry) The challenge is Reinventing The Industry THE EDGE OF CHAOS CHAOS THEORY SECOND CURVE TRANSFORMATION AND RENEWAL TO REINVENT THE INDUSTRY FIELD THEORY Leadership- COMPLEXITY SCIENCE Corporate-Scope of change and Single Reinventing the Leadership TO :Industry- transformation organisations The Organisation FROM : Transformation (Part of industry) An open system, A closed system,FIRST CURVE EVOLUTIONARY CHANGE that creates, generates, STRATEGY All that reacts, copes, processes REGENERATION (Whole company) encourages risk, improves incrementally, re-engineering Business process Process shaped by the future benchmarks, simplification Single and designed to shaped by the past and process Business and redesign (Part of restructuring transform and reinvent designed for survival; company) Standing Continuous Benchmarking itself continuously. Best Paradigm Paradigm still Improvement Practice shift Re-invention Smaller Better Faster Different Transformed Leaders makeChange and transformation Impact of the impossible happen LC108 ©BMI-CSLOR
  • PARADIGMS AND THE CULTURAL WEB Culture fulfils several important functions (Open University, 2006): • It reflects and reinforces a common sense of identity internally and externally • It aligns employees values and norms to those of the organisation • It enables the organisation to work as a social system • It provides a frame of reference for employees to draw upon when undertaking productive activities and serves as a guide for appropriate behaviourLC109 ©BMI-CSLOR
  • PARADIGMS AND THE CULTURAL WEBLC110 ©BMI-CSLOR
  • PARADIGMS AND THE CULTURAL WEB The three ‘soft’ (i.e. intangible) elements of the cultural web are – symbols, stories, rituals and routines Together The “soft” and “hard” elements of the cultural web capture life in any organisation. The three ‘hard’ (i.e. tangible) elements of the cultural web are power structure, organisation structure and control systems.LC111 ©BMI-CSLOR
  • PARADIGMS AND THE CULTURAL WEB The organisation’s paradigm refers to the “deeper level of basic assumptions and beliefs that are commonly shared by members of an organisation and defines the member’s view of the organisation and its environment.” (Boojihawon, 2006: 67) “The cultural web can be used to enable managers to surface and explore the core assumptions underpinning their paradigms, and therefore, facilitate the implementation of change.” (Boojihawon, 2006: 81. 82)LC112 ©BMI-CSLOR
  • PARADIGMS AND THE CULTURAL WEBLC113 ©BMI-CSLOR
  • FUTURE ORGANISATION CULTURAL WEB Added Value Projects Wealth Creation Relationships Home ownership Installed base Nation building Problem solving Family Life Unique Solutions Decentralised Distributed power Mutual respect Professional Planning meetings Expert knowledge Networking Informality Site meetings An entrepreneurial and creative company with high confidence and passion. Oriented towards visionary thinking, possibility and abundance, risk taking and reward sharing. Emphasis on continuous learning, teamwork, networking and long-term, win-win relationships. Commercial principles Emergent teams, self Simple rules selected and self organised; Influence rather than control Non hierarchical; Relationships emphasised Flat Structure; Budgeting and strict Financial Networking, Teamwork; Discipline Alliances, Joint Ventures Project management PartnershipsLC114 ©BMI-CSLOR
  • FUTURE STRUCTURE The NETWORK STRUCTURE is a flexible, non hierarchical organisational form that groupstogether a series of independent organisations to design, produce and market a given product or service. (Grant: 2002) The essential feature of networks is that the boundaries of the organisation are less distinct and permeable, so that the organisation becomes “boundaryless”. The network structure is common in dynamic and complex environments where creativity, innovation, and speed of response are key sources of advantage and fundamental to the effectiveness of the organisation. (Grant 2002)LC115 ©BMI-CSLOR
  • FUTURE STRUCTURE CORPORATE SUPPORT OFFICE TOGETHER WITH FACTORIES AND REGIONAL DISTRIBUTION CENTRES PROVIDES THE POLICY DIRECTION, STRATEGY AND COORDINATION NETWORK STRUCTURE REQUIRED FOR BUILDING AN EVERLASTING COMPANY Factories Regional Distribution Centres Human Resources Finance Supply Chain Manufacturing Marketing Logistics Policy Direction, Strategy and Coordination CORPORATE SUPPORT OFFICELC116 ©BMI-CSLOR
  • INDUSTRY REINVENTION Trends in the Property Market are inextricably MIAMI SCENARIO responsive to, and influenced by INVESTMENT CLIMATE, HIGH ROAD INVESTOR CONFIDENCE and PROPERTY DELIVERY. Planned development Property the preferred investment High affordability High confidence Profitable industry IPANEMA SCENARIO Investor Confidence UPPER MIDDLE ROAD Mixed development Property a good investment Average affordability Average confidence Average performing industry ALGARVE SCENARIO LOWER MIDDLE ROAD Haphazard development Property an average investment Low affordability Low confidence Surviving industry MOMBASA SCENARIO LOW ROAD Sporadic development MOST LIKELY OUTCOME Property a poor investment Poor affordability Struggling industry Investment Climate Closed System Open System Paradigm Regression Paradigm Paralysis Paradigm Shift Paradigm ReinventionLC117 Property a Poor Investment Average Good Property a Preferred Investment ©BMI-CSLOR
  • INDUSTRY REINVENTION Trends in the Property Market are inextricably MIAMI SCENARIO responsive to, and influenced by INVESTMENT CLIMATE, HIGH ROAD INVESTOR CONFIDENCE and PROPERTY DELIVERY. Planned development Property the preferred investment High affordability THREE DRIVING FORCES High confidence Profitable industry Strange Attractors? IPANEMA SCENARIO Investor Confidence Investment Climate UPPER MIDDLE ROAD Mixed development Property a good investment Investor Confidence Average affordability Average confidence Property Delivery Average performing industry ALGARVE SCENARIO LOWER MIDDLE ROAD Haphazard development Property an average investment Low affordability Low confidence Surviving industry MOMBASA SCENARIO LOW ROAD Sporadic development MOST LIKELY OUTCOME Property a poor investment Poor affordability Struggling industry Investment Climate Closed System Open System Paradigm Regression Paradigm Paralysis Paradigm Shift Paradigm ReinventionLC118 Property a Poor Investment Average Good Property a Preferred Investment ©BMI-CSLOR
  • INDUSTRY REINVENTION MAKING SENSE OF THE FUTURE OF THE RESIDENTIAL PROPERTY MARKET CURRENT REALITY vs Strategic Forum SCENARIOS (Source: BMI-BRSCU) INVESTOR CONFIDENCE Role of Consumer 7.00 Governmental influences Role of Intermediaries Primary Stakeholder influences (Players) 6.14 Role of Financial Institutions Secondary Stakeholder influences (Subjects) 5.29 Role of Influencers Tertiary Stakeholder influences (Referees) 4.43 Role of the Product 3.57 Neighbourhood influences 2.71 Role of Secondary Housing Market Environmental influences 1.86 1.00 Role of the New Housing Market Promotional influences Role of the Estate Agent Market influences PROPERTY DELIVERY INVESTMENT CLIMATE Confidence related Cost related Lifestyle related Policy related Resource related Promotion and marketing related Finance related Market related CURRENT REALITY (3,92) Higher Middle Road Algarve Scenario (4,86) Lower Middle Road Ipanema Scenario (4,00) High Road Miami Scenario (5,72) Low Road Mombasa Scenario (3,14)LC119 ©BMI-CSLOR
  • INDUSTRY REINVENTION MAKING SENSE OF THE FUTURE OF THE RESIDENTIAL PROPERTY MARKET Assigning values to the CURRENT REALITY vs Strategic Forum SCENARIOS QUALITATIVE generic variables (Source: BMI-BRSCU) influencing change allows for INVESTOR CONFIDENCE quantifcation and positioning of the Role of Consumer 7.00 Governmental influences CURRENT REALITIY relative to the Role of Intermediaries Primary Stakeholder influences (Players) 6.14 IDEALISED SCENARIOS. It also Institutions Role of Financial Secondary Stakeholder influences (Subjects) 5.29 shows where performance isof Influencers Role good Tertiary Stakeholder influences (Referees) and where intervention is required. 4.43 Role of the Product 3.57 Neighbourhood influences 2.71 Role of Secondary Housing Market Environmental influences 1.86 1.00 Role of the New Housing Market Promotional influences Role of the Estate Agent Market influences PROPERTY DELIVERY INVESTMENT CLIMATE Confidence related Cost related Lifestyle related Policy related Resource related Promotion and marketing related Finance related Market related CURRENT REALITY (3,92) Higher Middle Road Algarve Scenario (4,86) Lower Middle Road Ipanema Scenario (4,00) High Road Miami Scenario (5,72) Low Road Mombasa Scenario (3,14)LC120 ©BMI-CSLOR
  • INDUSTRY REINVENTION MAKING SENSE OF THE FUTURE OF THE RESIDENTIAL PROPERTY MARKET CURRENT REALITY vs Strategic Forum SCENARIOSCurrent Reality (3,92) indicates that (Source: BMI-BRSCU)Residential Property is between the INVESTOR CONFIDENCELow Road (3,14) (Mombasa) and the Role of Consumer 7.00 Governmental influences Role of Intermediaries Primary Stakeholder influences (Players)Lower Middle Road (4,00) 6.14(Ipanema) scenarios. Role of Financial Institutions Secondary Stakeholder influences (Subjects) 5.29 Role of Influencers Tertiary Stakeholder influences (Referees) 4.43 Role of the Product 3.57 Neighbourhood influences 2.71 Role of Secondary Housing Market Environmental influences 1.86 1.00 Role of the New Housing Market Promotional influences Role of the Estate Agent Market influences PROPERTY DELIVERY INVESTMENT CLIMATE Confidence related Cost related Lifestyle related Policy related Resource related Promotion and marketing related Finance related Market related CURRENT REALITY (3,92) Higher Middle Road Algarve Scenario (4,86) Lower Middle Road Ipanema Scenario (4,00) High Road Miami Scenario (5,72) Low Road Mombasa Scenario (3,14)LC121 ©BMI-CSLOR
  • INDUSTRY REINVENTION ASSETS MORTGAGED : RESIDENTIAL PROPERTY : 1980-2008 STRATEGIC FORUM SCENARIOS: 2009-2020 (Source : SARB, MFA DATABASE, BMI-BRSCU) 435 000 385 000 Residential Property: 1980-2009 High Road Miami Scenario 335 000 Higher Middle Road Algarve RAND MILLION AT CONSTANT 2010 PRICES Lower Middle Road Ipanema Scenario Low Road Mombasa Scenario 285 000 235 000 185 000 135 000 Current most likely outcome is between 85 000 the Low Road Mombasa and the Lower Middle Road Ipanema Scenario 35 000 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020LC122 ©BMI-CSLOR
  • INDUSTRY REINVENTION INVESTMENT CLIMATE After 9/11, the terrorist attack in New York, and after the crash of the stock market in 2000, 2001, “the only place that individuals have said my money is safe is in my own home”. And as a consequence of that, “There’s firmly embedded in the global culture this idea that you can’t go wrong investing in property.” (Simon Marais, Alan Gray as quoted on Moneyweb, 12 July 2004)LC123 ©BMI-CSLOR
  • INDUSTRY REINVENTION INVESTMENT CLIMATE After 9/11, the terrorist attack in New York, and after the crash of the stock market in 2000, 2001, individuals have said “the only place The world’s second wealthiest man, that investment guru Warren Buffett, said my money is had found “very my own this year he safe is in few attractive shares to buy” “ Joe home”. Public’ is still seeing bricks And as a consequence of that, “There’s firmly and mortar as more embedded in the global culture this attractive than securities idea that youbonds”.go wrong and can’t (Researchworldwide.com, 18 March 2005) investing in property.” (Simon Marais, Alan Gray as quoted on Moneyweb, 12 July 2004)LC124 ©BMI-CSLOR
  • INDUSTRY REINVENTION PROGNOSIS ON THE PROPERTY MARKET • Affordability of Housing DECLINING. • Real House prices are some 5% below 2007 (But . . . A massive 87% higher than 2000) • Price difference between new and existing houses widening (new housing now 32% more than existing) • Interest rates at historically low levels • Debt levels of households increasing • The GLOBAL PROPERTY BUBBLE is now history. The market in SA has adjusted downward quite dramatically in a hard landing. Residential building on the way to gradual recovery. Non Residential building declining. Many other factors unique to the South African market mitigated against a bubble type collapse of the market.LC125 ©BMI-CSLOR
  • INDUSTRY REINVENTION PROGNOSIS ON THE PROPERTY MARKET • Affordability of Housing DECLINING. • Real House prices are some the border between (But . . . A When the system operates in 5% below 2007 stability and instability, forecasting, envisioning massive 87% higher than 2000) future states, or even making any assumptions • Price difference between states, and existing houses about future new are ineffective widening One would have to now 32% on using (new housing rely instead more than existing) • qualitative patternsintuition by analogy and to reason Interest rates at historically low levels • stability and instabilityin the borders between Those who succeed Debt levels of households increasing would be those who see • The GLOBAL PROPERTY BUBBLE is now history. The patterns where others search for specific links market in SA has between causes and events. Organisational adjusted downward quite dramatically in a (Source: Based on Stacey, Ralph D. Strategic Management & hard landing. Residential building on the way to gradual Dynamics. The challenge of Complexity: 2000: 259) recovery. Non Residential building declining. Many other factors unique to the South African market mitigated against a bubble type collapse of the market.LC126 ©BMI-CSLOR
  • Affordable Real House Prices (Rand)LC127 0 50 000 100 000 150 000 200 000 250 000 300 000 01-Mar-1980 01-May-1981 01-Jul-1982 01-Sep-1983 01-Nov-1984 01-Jan-1986 01-Mar-1987 01-May-1988 01-Jul-1989 01-Sep-1990 01-Nov-1991 01-Jan-1993 01-Mar-1994 01-May-1995 01-Jul-1996 01-Sep-1997 01-Nov-1998 01-Jan-2000 01-Mar-2001 01-May-2002 INVESTMENT CLIMATE 01-Jul-2003 01-Sep-2004 (Source: ABSA HPI; BMI-BRSCU Workings) 01-Nov-2005 01-Jan-2007 01-Mar-2008 01-May-2009 01-Jul-2010 Affordable Housing: Real prices: 1980 - YTD 2011©BMI-CSLOR
  • INVESTOR CONFIDENCE MFA COMPOSITE LEADING INDICATOR (CLIBI) FOR THE SOUTH AFRICAN BUILDING INDUSTRY 100 90 Shaded areas represent the upswing phase OPTIMISM of the business cycleOPTIMISM 80 ? PESSIMISM < 50 > OPTIMISM 70 60 50PESSIMISM 40 30 20 10 PESSIMISM 0 | 71 | 74 | 77 | 80 | 83 | 86 | 89 | 92 | 95 | 98 | 01 | 04 | 07 | 10 | 13 Source: FNB / BER; SARB; MFA DATABASELC128 ©BMI-CSLOR
  • INVESTOR CONFIDENCE MFA COMPOSITE LEADING INDICATOR (CLIBI) FOR THE SOUTH AFRICAN BUILDING INDUSTRY 100 90 Shaded areas represent the upswing phase OPTIMISM of the business cycle CONFIDENCE TURNING?OPTIMISM 80 Now is NOT the best time for buy-to-let ? PESSIMISM < 50 > OPTIMISM 70 investments. 60 (Unless the Lets are BLUE-CHIP Corporate Tennants) 50 For some investors in residential property it is, in fact,PESSIMISM 40 TIME TO CASH IN. 30 20 10 PESSIMISM 0 | 71 | 74 | 77 | 80 | 83 | 86 | 89 | 92 | 95 | 98 | 01 | 04 | 07 | 10 | 13 Source: FNB / BER; SARB; MFA DATABASELC129 ©BMI-CSLOR
  • PROPERTY DELIVERY New mortgage loans and readvances by month and application: Jan 1993- June 2011 (Source: SARB, BMI-BRSCU Workings) 40 000 Existing 35 000 Building Loans 30 000 R Millions (Current Values) 25 000 20 000 New 15 000 Building Loans 10 000 5 000 0 2010/07 2011/02 1993/01 1993/08 1994/03 1994/10 1995/05 1995/12 1996/07 1997/02 1997/09 1998/04 1998/11 1999/06 2000/01 2000/08 2001/03 2001/10 2002/05 2002/12 2003/07 2004/02 2004/09 2005/04 2005/11 2006/06 2007/01 2007/08 2008/03 2008/10 2009/05 2009/12 New mortgage loans and re-advances applied on existing buildings Gross new mortgage loans and re-advances for construction of buildings Net new mortgage loans and re-advances applied on vacant land 12 per. Mov. Avg. (New mortgage loans and re-advances applied on existing buildings)LC130 ©BMI-CSLOR
  • The challenge is TO REINVENT THE LEADERSHIP FIRST THEN THE ORGANISATION THEN THE INDUSTRY Leaders make the impossible happenLC131 ©BMI-CSLOR