Leadership And Complexity

Towards making sense Complexity science implications for Leadership, Business and Industry Leaders make the impossible happen Dr. Llewellyn B. Lewis BMI CENTRE FOR STRATEGY, LEADERSHIP- AND ORGANISATIONAL- REINVENTION www.leadershipreinvention.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)

www.leadershipreinvention.co.za THE LANGUAGE OF COMPLEXITY

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)

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)

THE LANGUAGE OF COMPLEXITY Source: Stacey, Ralph D. Strategic Management & Organisational Dynamics. The challenge of Complexity: 2000)

Chaos

Complexity

Diversity

Strange Attractors

Emergence

Self Organisation

Critical Mess

Order for Free

The Butterfly effect

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)

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)

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)

Rules are then necessary to explain how each of the sets of interrelated measurements, at each measurement 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)

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)

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)

THE LANGUAGE OF COMPLEXITY THE NOBEL PRIZE: 2005

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)

SELF-DIRECTED TRANSFORMATION CRITICAL MESS ENVIRONMENTAL CHANGE RISK RUDE AWAKENING CHAOS UNCERTAINTY FIRST CURVE SECOND CURVE CREATING THE FUTURE IMPOSSIBLE RESULTS EMERGENCE STRANGE ATTRACTORS (Based on Handy : 1994) THE BUTTERFLY EFFECT THE EDGE OF CHAOS COMPLEXITY FIELD THEORY ZONE OF CREATIVITY AND ADAPTABILITY LEADERSHIP AND COMPLEXITY

YOUNG (Development, Growth) PRIME (Shakeout) MATURE (Maturity) DEMISE (Decline) High Low Low High INTEGRATION – Have capabilities, can do things DIFFERENTIATION Can recognise new things (Source: Based on Wind and Crook: 2005) (Source: Johnson and Scholes: 2002) LEADERSHIP AND COMPLEXITY YOUNG PRIME MATURE DEMISE

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 physical development, although many consistently reinvent themselves to stay young in their thinking. (Source: Based on Wind and Crook: 2005)

LEADERSHIP AND COMPLEXITY

TWO PARADIGMS OF BUSINESS UNIVERSAL BUSINESS PARADIGM RE-INVENTION BUSINESS PARADIGM

Quantum Physics

Non Linear, organic and complex adaptive system

Systems theory, Chaos theory, Complexity Science

Influence, rather than control

Emergent teams, self selected and self organised

Uncertainty, limited ability to predict

A WORLD MADE UP OF RELATIONSHIPS WITH INFINITE POSSIBILITIES

Newtonian Mechanics

Linear thinking

Mechanistic

Cause and effect

Action and reaction

Centralised Control

Hierarchical structure

Job titles and job descriptions

Predictability

A WORLD MADE UP OF THINGS WITH FINITE POSSIBILITIES

(Based on Lewin and Regine : 1999)

THE WORLDS OF HORUS* AND SETH* INDUSTRIAL AGE CULTURE IN THE AGE OF HORUS* INFORMATION AGE “SPIRIT” IN THE AGE OF SETH*

Learn a skill

Security

Job preservation

Capital equipment

Status quo

Hierarchical and regulated

Zero sum

Measure inputs

(Grulke : 2000) Seth, the god of chaos and disorder. * Horus, the god of structure and predictability. Even thousands of years ago, the conflict between order and chaos, and the dilemmas created for those in authority, were well recognised.

Lifelong learning

Risk-taking

Job creation

Intellectual capital

Speed and change

Distributed and networked

Win-win

Measure outputs

THE WORLDS OF HORUS* AND SETH* (Grulke : 2000) “ 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.”

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)

ECONOMY IN TRANSITION INDUSTRIAL ECONOMY RESOURCES INFORMATION ECONOMY RESOURCES

Information

Knowledge

Skills and Ideas

Raw Materials

Real Estate

Cheap Labour

(Grulke : 2000) 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 AND COMPUTER TECHNOLOGIES, HAS BROUGHT MORE ECONOMIC TRANSFORMATION IN 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 .

LEADERSHIP IN TRANSITION INDUSTRIAL AGE INFORMATION AGE

Skills

Attitude

Leadership

Knowledge

Experience

Management

(Grulke : 2000) THE NEW JOBS DEMAND THE ABILITY TO APPLY KNOWLEDGE IN THE FORM OF SKILLS. EXPERIENCE HAS CONTINUALLY LESS VALUE AS THE PACE OF CHANGE INCREASES - 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.

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) LEADERSHIP REINVENTION

ROMANTIC DREAMERS Dreams Disturbing the status quo Paradigm shift Not possible results SUPERMAN(AGER)S (SHAKERS) Developing Vision, Setting goals Focus on Doing (more, better, faster) Paradigm pioneering Stretch results DOING Processes, Policies and Business Detail BEING Passion, Charisma and REINVENTION CHANGE AGENTS TRANSFORMATIONAL CATALYSTS TRANSFORMATIONAL LEADERS (MOVERS) Creating context Focus on Being (Transformation) Paradigm reinvention Impossible results PRACTICAL DOERS Routine tasks Following orders Paradigm enhancement Possible results DOERS AND DREAMERS SHAKERS AND MOVERS LEADERSHIP REINVENTION

(Based on Treat : 1999) FUTURE UNKNOWN WORLD (“The Promised Land”) CURRENT KNOWN WORLD (“The Wilderness”) The Great Exchange

Pull of the Past

Slavery

Day to Day issues

Satisfied with Mediocrity

Surviving

Conformity

Grasshopper Paradigm

Paradigm Paralysis

Challenge of the Future

Freedom

Dreams and Visions

Striving for Excellence

Thriving

Transformation

Eagle Paradigm

Paradigm Reinvention

UNIVERSAL HUMAN PARADIGM FOCUS ON DOING REINVENTION MASTER PARADIGM FOCUS ON BEING LEADERSHIP REINVENTION

FUTURE UNKNOWN WORLD (“The Promised Land”) CURRENT KNOWN WORLD (“The Desert”) The Great Exchange 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) LEADERSHIP REINVENTION

FUTURE UNKNOWN WORLD (“The Promised Land”) CURRENT KNOWN WORLD (“The Wilderness”) The Great Exchange 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) LEADERSHIP REINVENTION

Behind the Change Curve Ahead of the Change Curve Strategic Drift Demise Transformation or REINVENTION (Source: Based on Johnson and Scholes: 2002) 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) 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) 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.

(Lewin and Regine : 1999) BUSINESS AND COMPLEXITY

(Lewin and Regine : 1999)

The simulation begins with the boids placed randomly in 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 system as 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 contrast with central control , which is what many CEO’s usually try to achieve when they follow a mechanistic model of management.

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 .

(Lewin and Regine : 1999) BUSINESS AND COMPLEXITY

(Source: Johnson and Scholes: 2002) BUSINESS AND COMPLEXITY

A shift from viewing the world as simple, predictable and settling to equilibrium TO acknowledging that it is complex, unpredictable and far from equilibrium PARADIGM SHIFT IN THE WORLD OF BUSINESS : (Lewin and Regine : 1999) BUSINESS AND COMPLEXITY

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)

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.” BUSINESS REINVENTION

UNIVERSAL BUSINESS PARADIGM RE-INVENTION BUSINESS PARADIGM

Quantum Physics

Non Linear, organic and complex adaptive system

Systems theory, Chaos theory, Complexity Science

Influence, rather than control

Emergent teams, self selected and self organised

Uncertainty, limited ability to predict

A WORLD MADE UP OF RELATIONSHIPS WITH INFINITE POSSIBILITIES

Newtonian Mechanics

Linear thinking

Mechanistic

Cause and effect

Action and reaction

Centralised Control

Hierarchical structure

Job titles and job descriptions

Predictability

A WORLD MADE UP OF THINGS WITH FINITE POSSIBILITIES

(Lewin and Regine : 1999) 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) 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) BUSINESS REINVENTION

Paradigm Re-invention Scope of change and transformation Different All processes (Whole company) Single process (Part of company) Standing still Continuous Improvement Paradigm shift Best Practice Benchmarking Smaller Impact of Change and transformation Better Business process re-engineering The current and known world The future, unknown Transformed Business restructuring Process simplification and redesign Reinventing the Leadership The Organisation Reinventing The Industry All organisations (Whole industry) Single organisations (Part of industry) STRATEGY REGENERATION FIRST CURVE EVOLUTIONARY CHANGE SECOND CURVE TRANSFORMATION AND RENEWAL THE EDGE OF CHAOS CHAOS THEORY FIELD THEORY COMPLEXITY SCIENCE Faster INDUSTRY AND COMPLEXITY Leadership- Corporate- Industry- Transformation

INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS (Source: Based on Johnson and Scholes: 2002) First curve Second curve Creativity Emergence Intuitive capacity Permeable boundaries PARADIGMS

INDUSTRY AND COMPLEXITY

Hot Spots = (Cooperative Mindset x Boundary Spanning x Igniting Purpose) x Productive Capacity INDUSTRY AND COMPLEXITY

Hot Spots = (Cooperative Mindset x Boundary Spanning x Igniting Purpose) x Productive Capacity Emergence of a Cooperative Mindset depends on the attitude of Leaders towards cooperation and competition and their capacity and willingness to craft within the organisation a sense of mutuality and congeniality. The energy of the cooperative mindset has to be channeled across boundaries for the innovative capacity of a Hot Spot to emerge. For this well of latent energy to be released there has to be a point of ignition. This igniting purpose, can be an igniting vision, question, or task. These three elements have a multiplier effect on each other. Together they are capable of creating energy and excitement. For this energy to be channeled into productive outcomes requires the fourth element, productive capacity. This capacity is the extent to which members within the Hot Spot are capable of working together in a productive manner . INDUSTRY AND COMPLEXITY

Emergence of a Cooperative Mindset: It starts with assumptions (Source: Gratton: 2007) Assumptions of cooperation Designing for cooperative Practices and processes Cooperative Social norms Cooperative Language And stories Legitimisation of Cooperative behaviour and habits Delegitimisation of competitive behaviour and habits INDUSTRY AND COMPLEXITY

Depth of Relationships Extent of Boundary Spanning Within the Group Outside the Group Close friends and Strong relationships (strong ties) Acquaintances And associates (weak ties) Exploitation Exploration Innovation Confirmation IPD eProp SAPOA SAARF BMR NHBRC CIDB ABSA FNB Standard Bank Nedbank UNISA Greenwich University BER Rode Industry Insight Cement and Concrete Institute SAFCEC BIFSA SA Steel Institute BMI-BRSCU MFA Econometrix Political Dynamics Reconfiguration Information arbitrage Information arbitrage Information arbitrage Information arbitrage (Source: After Gratton: 2007) Another version of Stakeholder analysis INDUSTRY AND COMPLEXITY

Forms an igniting purpose can take (Based on Gratton: 2007:102) INDUSTRY AND COMPLEXITY

Forms an igniting purpose can take (Based on Gratton: 2007:102) Can we develop deep strategic understanding of the Current Reality of the Building Industry Environment ? Developing Competitive Industry Foresight and Strategic Leadership as a way of Business Life. Turning Data into Wisdom, Exposing Paradigm Blindspots, and challenging the Industry to REINVENT continuously. INDUSTRY AND COMPLEXITY

Points of inflection in organisations: shifting from old rules to new (Gratton: 2007: 145) 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 INDUSTRY AND COMPLEXITY

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. Many companies are beginning to approach the apex of the first curve, when simply doing more of the same is not increasing the value of their companay. To do so they will have to abandon some of the old rules, and begin to build competence and energy around the new rules of the second curve. Those that fail to do so will see a gradual but consistent decline in the capacity to create value. At the heart of the second curve are the rules of Hot Spots – the idea that energy can be ignited, that relationships and networks are crucial , that commitments and conversations can replace rules and directives. This is no easy challenge. As leaders and members of organisations, we often find ourselves at points of inflection . What worked in the past is not working so well anymore. Points of inflection in organisations: shifting from old rules to new (Gratton: 2007: 145) 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. INDUSTRY AND COMPLEXITY

The Hot Spot Scenario: mapping emergence (Gratton: 2007: 145) INDUSTRY AND COMPLEXITY

Productive capacity Data analysis, developing WISDOM Cross functional Networking Website, sharing of ALL INFORMATION, empowering Information ARBITRAGE Socratic dialogue, asking the BIG questions Exchanging and TRANSFORMING facts BMI Associates Subscribers Modeling cooperative behaviour REINVENTION The Hot Spot Scenario: mapping emergence (Based on Gratton: 2007: 145) INDUSTRY AND COMPLEXITY

Towards Making sense of the future of the Building Industry System Dr. Llewellyn B. Lewis November 2007

THE STRATEGIC FORUM

A place of assembly

for strategic conversations

BMI Studium Ad Prosperandum Voluntas in Conveniendum BUILDING RESEARCH STRATEGY CONSULTING UNIT cc Reg. No. 2002/105109/23 • BMI Studium Ad Prosperandum Voluntas in Conveniendum BUILDING RESEARCH STRATEGY CONSULTING UNIT cc • THE STRATEGIC FORUM www.strategicforum.co.za BMI • BMI • BMI

INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS (Source: Based on Johnson and Scholes: 2002) Many Organisations Lots of Ideas Variety Potential volatility Intuitive capacity Permeable boundaries Creativity emergence Potential Innovation

INDUSTRY AND COMPLEXITY (Source: Fortune, 11 September 2006) THE EDGE OF CHAOS

INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS (Source: Fortune, 11 September 2006) “ We’re willing to tolerate ambiguity and chaos because that’s where the room is for innovation.” Larry Page Sergey Brin Eric Schmidt

INDUSTRY AND COMPLEXITY THE EDGE OF CHAOS (Source: Fortune, 11 September 2006)

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.

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.

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.

Present Past Future The Edge of Time Chaos Edge of Chaos Structure The Edge of Chaos (Source: Brown and Eisenhardt: 1998) COMPETING ON THE EDGE OF CHAOS

(Source: Brown and Eisenhardt: 1998) COMPETING ON THE EDGE OF CHAOS

Roll out new branches, source and develop new products, develop new markets, discover new customers, diversify. LEADING CHANGE. (Source: Brown and Eisenhardt: 1998: 23) Building Blocks COMPETING ON THE EDGE OF CHAOS

Navigating the Edge of Chaos: Improvisation Entrepreneurial and creative, visionary thinking, possibility and abundance, continuous learning, Emergent teams, self selected and self-organised, emergent strategy Simple rules, Influence rather than control, Flat structure, Strategic Conversations, COMMUNICATION (Source: After Brown and Eisenhardt: 1998: 47) COMPETING ON THE EDGE OF CHAOS

Co-adaptation Networking, teamwork, alliances, joint ventures, partnerships Industry Knowledge, Local autonomy, decentralised, distributed power. Rapid response, Flexibility, Leveraging strategic capability, Unique resources, core competencies (Source: After Brown and Eisenhardt: 1998: 80) COMPETING ON THE EDGE OF CHAOS

Regeneration Simultaneous first and second curve thinking; Leveraging core competencies across Business Units. Protect and build; Product enhancement; market penetration; Create services that exploit change. Respect experience; Win-win relationships; Redefine the boundaries, change the game rules, reconfigure the value chain. (Source: After Brown and Eisenhardt: 1998: 114) COMPETING ON THE EDGE OF CHAOS

Experimentation Creativity and innovation; explore opportunities within context of strategic intent Strategise to intercept the future, Market development, product development, diversification. Exploring the future, emerging strategy, Reinvention and transformation (Source: After Brown and Eisenhardt: 1998: 149) 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) COMPETING ON THE EDGE OF CHAOS

(Source: Based on Roger Lewin. Complexity. Life at the edge of chaos: 1999) THE GLOBAL PROPERTY INDUSTRY Local Interaction, local knowledge Emergent Global Property market Not imposed by any one guru or institution or government. The result of the individual choices of millions of people world-wide.

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)

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 simultaneously

Demand and Supply Equilibrium RH SA RES PROPERTY MARKET AH MIH Legend: AH - Affordable Housing MIH - Middle Income Housing LH - Luxury Housing RH - Retirement Housing BTL – Buy to Let Market Loosening Market Tightening Market Source : Based on Viruly BTL LH 1999 2005 2008? UNDERSUPPLY Demand exceeds supply Prices increase Buyer resistance develops Market tightens OVERSUPPLY Supply exceeds demand Competition increases Prices moderate Market loosens 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)

The consequence is that any decision-making process that involves forecasting, envisioning future 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)

Paradigm Re-invention Scope of change and transformation Critical mass of Investors (Whole community) Single Investor (Part of community) Paradigm Pioneer Early adopter Paradigm shift Late Adopter Bandwagon Flocking Herd behaviour Impact of Change and transformation All Countries (Whole World) Single Country (Part of World)

THE LOCAL PROPERTY MARKET

LIMITS TO GROWTH PARADIGMS CHALLENGED ALTERNATIVE INVESTMENTS

REINVENTION

A Structural Change?

Self Organisation

Order for Free!

Property a preferred Investment!

THE GLOBAL PROPERTY ENVIRONMENT

DEMISE

THE PROPERTY BUBBLE?

THE EDGE OF CHAOS CREATIVITY INNOVATION The current and known world The future, unknown IMF World Bank Ministry Treasury Banks Public opinion Individual 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) 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) INDUSTRY AND COMPLEXITY

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) Is the IMF in Control of the System? INDUSTRY AND COMPLEXITY

No one Is in control of the system! Truth be told INDUSTRY AND COMPLEXITY But . . . There are Important Influencers and Influences

PROGNOSIS ON THE PROPERTY MARKET: ALAN GREENSPAN “ The housing market will inevitably cool down and prices may even decline.” (28 August 2005) 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)

INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCER

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)

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) INDUSTRY AND COMPLEXITY IMPORTANT INFLUENCES

Paradigm Re-invention Scope of change and transformation Different All processes (Whole company) Single process (Part of company) Standing still Continuous Improvement Paradigm shift Best Practice Benchmarking Smaller Impact of Change and transformation Better Business process re-engineering The current and known world The future, unknown Transformed Business restructuring Process simplification and redesign Reinventing the Leadership The Organisation Reinventing The Industry All organisations (Whole industry) Single organisations (Part of industry) STRATEGY REGENERATION FIRST CURVE EVOLUTIONARY CHANGE SECOND CURVE TRANSFORMATION AND RENEWAL THE EDGE OF CHAOS CHAOS THEORY FIELD THEORY COMPLEXITY SCIENCE Faster The challenge is TO REINVENT THE INDUSTRY FROM : A closed system, that reacts, copes, improves incrementally, benchmarks, shaped by the past and designed for survival; TO : An open system, that creates, generates, encourages risk, shaped by the future and designed to transform and reinvent itself continuously. Leaders make the impossible happen INDUSTRY REINVENTION Leadership- Corporate- Industry- Transformation

Trends in the Property Market are inextricably responsive to, and influenced by INVESTMENT CLIMATE, INVESTOR CONFIDENCE and PROPERTY DELIVERY. Investor Confidence Investment Climate NO CONFIDENCE / LOW / AVERAGE / HIGH CONFIDENCE Risk Avoidance Risk Aversion Risk Tolerance Risk Taking Closed System Open System Closed System Open System Paradigm Regression Paradigm Paralysis Paradigm Shift Paradigm Reinvention Property a Poor Investment Average Good Property a Preferred Investment MIAMI SCENARIO BOUYANT GROWTH Planned development Property the preferred investment High affordability High confidence Profitable industry IPANEMA SCENARIO AVERAGE GROWTH Mixed development Property a good investment Average affordability Average confidence Average performing industry ALGARVE SCENARIO NO/LOW GROWTH Haphazard development Property an average investment Low affordability Low confidence Surviving industry MOMBASA SCENARIO NEGATIVE GROWTH Sporadic development Property a poor investment Poor affordability Struggling industry Property Delivery

THREE DRIVING FORCES

Strange Attractors?

Investment Climate

Investor Confidence

Property Delivery

INDUSTRY REINVENTION

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 that 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)) The world’s second wealthiest man, investment guru Warren Buffett, said this year he had found “very few attractive shares to buy” “ Joe Public’ is still seeing bricks and mortar as more attractive than securities and bonds”. (Researchworldwide.com, 18 March 2005) INDUSTRY REINVENTION INVESTMENT CLIMATE

OPTIMISM PESSIMISM CONFIDENCE TURNING? Now is NOT the best time for buy-to-let investments. (Unless the Lets are BLUE-CHIP Corporate Tennants) For some investors in residential property it is, in fact, TIME TO CASH IN. INVESTOR CONFIDENCE

OPTIMISM PESSIMISM INVESTOR CONFIDENCE

New Building Loans Existing Building Loans PROPERTY DELIVERY

PROGNOSIS ON THE PROPERTY MARKET

Affordability of Housing DECLINING.

Real House prices are at HISTORICALLY HIGH LEVELS (But . . . Only 10% higher than 20 years ago)

Price difference between new and existing houses closing (new housing now only 10% more than existing)

Interest rates at historically low levels

Debt levels of households increasing

The likelihood of a PROPERTY BUBBLE is fairly low at present. The market is adjusting downward naturally in a soft landing. Luxury housing showing signs of a slowdown. Non Residential market increasing. Many other factors unique to the South African market which argue against a bubble type collapse of the market.

INDUSTRY REINVENTION When the system operates in the border between stability and instability, forecasting, envisioning future states, or even making any assumptions about future states, are 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)

TO REINVENT THE LEADERSHIP FIRST THEN THE ORGANISATION THEN THE INDUSTRY Leaders make the impossible happen The challenge is