Business, management and strategy in the new paradigm
By: Rafael Kaufmann
Tags: Systems Thinking, Conscious Capitalism, Management And Leadership, Strategy, Economics

The recent statement from the Business Roundtable to “redefine the purpose of a corporation” vindicates those who have long advocated a new paradigm of business and management. Although tentative and fuzzy on the specifics, the statement is a giant step for a movement that until very recently was described as “fringe”. Now it is no longer a question of whether a new business and economy are seriously conceivable, but what this new model will look like, when it’s coming, and how to bring it into life. Some call it “conscious business”, but that doesn’t capture the full spectrum of what truly is a complete reinterpretation of most aspects of socioeconomic life. For this reason, I’ll just call it “the new paradigm”.

Even ardent advocates of the new paradigm often sell it as a risk reduction strategy — against climate change, civil unrest, or economic collapse. But just as importantly, the new paradigm will also unlock entirely new and enormous opportunities for value creation, although those will look quite unlike what we’re taught to look for in business today. In this article, I’ll explore how that cluster of shifts creates new ways to think about business, management and strategy. But first, I’ll argue that the new paradigm arises from the old, in natural — though unexpected — ways.

Before I dive in: I don’t claim much new thought in this article, but mostly attempt to show that the various ongoing transformations in business and management are just different lenses on the same phase transition in our enormously complex system. For that reason, I don’t expand a lot on specific topics. I’ve tried to give good in-depth references, but I’ll inevitably have missed some. If you think I’m missing some crucial connection, let me know!

Capitalism meets the universal mind

The old paradigm is what most of us know as “textbook capitalism”, a market system driven by competition and self-interest from participants. In this paradigm, the system of market exchanges and prices leads participants to self-organize in a way that creates positive-sum outcomes (compared to other modes of organization, or compared to no exchanges at all). Through the “invisible hand”, firms thrive in the market to the extent that their products are valuable to their customers; this mechanism aligns firms’ self-interest with the motivation to generate value.

Although this paradigm has been responsible for an unprecedented, centuries-long explosion in human prosperity, we know that, when imperfect humans are in play, markets can generate quite undesirable and unstable outcomes. Some typical issues arising are negative externalities (the tragedy of the commons), inequality (the richer get richer), incomplete contracts, and the definition of value itself.

Indeed, Adam Smith himself saw the market system as only part of the overall “social order”. He considered his Theory of Moral Sentiments as providing the underpinnings to his work on economics. Smith’s core idea was that humans’ very nature as social creatures, possessed with moral ideas and actions, lead us to self-organize into a society where outcomes are not only efficient, but also harmonious and functional.

While this perspective has mostly been ignored by the economic mainstream, Smith’s theory of how we limited humans are able to create stable and functioning societies has dovetailed with advances in social psychology, evolutionary biology, information theory and other fields, coming together in an embryonic science of complex adaptive systems. This science is growing to provide a coherent account of how such systems evolve to exhibit not only productive efficiency, but also resilience and — even more surprisingly — the ability to adapt and respond to changes. In fact, an emerging current holds “collective intelligence” as a phenomenon as concrete and measurable as human intelligence, and describes all humanity as part of a great web of “superminds”.

Even more remarkably, the growing common knowledge of these facts — as embodied by the behavior of industry leaders, academics, policy-makers, activists, and consumers making their daily choices — is enabling a transition to a new stable equilibrium, a complete transformation in the socioeconomic behavior of the human species, where choices and decisions are driven by meaning and long-term value, by default. This new equilibrium does not replace capitalism, quite the contrary: it opens up new degrees of freedom for capitalism to operate in, transforming it into an even more powerful mechanism of prosperity.

There is a reason why words like “intelligent”, “conscious”, “mindful” and “transcendent” have been appearing in the business lexicon: they help us verbalize the massive shift in self-understanding that is going on, and the changes in behavior enabled by this shift. However, this isn’t a collective epiphany where tough-hearted businessmen are suddenly transformed into saints or Buddhas, quite the opposite: it is a transformation in the cultural and economic framework between these businessmen, creating a context where they have no choice to behave in a way that’s more aligned to the common interest. We don’t have to count on the kindness of anyone’s hearts: just like in good old capitalism, we can rely on enforced norms that keep misaligned incentives in check. The warm fuzzies are a consequence, not a cause.

Thriving in the wild: the new business

The new paradigm is a socioeconomic system which literally manages itself and learns, through the aggregate knowledge and wisdom of the intelligences that compose it, to adequately preserve and grow the vast reserves of infrastructure — physical, natural, human/intellectual, and social/trust capital — that sustain it.

Business in the new paradigm is about:

Long-term stakeholder value over short-term financials;

over short-term financials; Purpose and principles over expedience and opportunism;

over expedience and opportunism; Scaling responsibly , not as fast as possible;

, not as fast as possible; Healthy ecosystems over “crushing the competition”;

over “crushing the competition”; Adding unique value over zero-sum “disruption”;

over zero-sum “disruption”; Trust-based relationships over one-shot transactions.

This new take on business turns conventional wisdom on its head, and indeed may seem quite out of touch at a time when the president of the world’s top superpower happens to be the proud poster child for predatory, short-term capitalism. But the trail has been blazed by companies like Google and Whole Foods, both of which were considered insane at the time for taking this contrarian view of business, and proceeded to prove critics fantastically wrong. Now, with the rise of ESG investing, as well as the increasingly frequent market and regulatory backlash against ill-behaved players — think Uber, WeWork, Martin Shkreli, Purdue Pharma — we can more clearly see that those early successes were not outliers, but precursors. As B-Corps and other formats become commonplace, expectations are well-understood and legal frameworks are clarified, we start to meet the conditions for the effects of common knowledge to set in — the “new normal” where irresponsible businesses don’t get to thrive.

Social forestry: the new organizations

The new paradigm also asks us to look at the structure of a corporation in a radically different light. The static, clearly defined, tightly siloed organization, interfacing only via careful contracts is no longer feasible. Instead, we have a tangled web of ever-shifting entities, fuzzily defined by permeable membranes, interlocked in a variety of mutually-dependent relationships. Whether these constitute separate “businesses” will be like wondering whether your intestinal microbes are distinct from you or not. (Interestingly, shortly after writing this paragraph, I found this excellent article from Erik Vermeulen expressing basically the same point, which I suppose shows where the zeitgeist is!)

Managing and designing organizations in the new paradigm is more like tending a garden than running a well-oiled machine. It’s about:

Embracing the reality of constant change , not creating illusions of stability and control;

, not creating illusions of stability and control; Being stewards of the organization’s purpose and principles , not feudal lords optimizing locally;

, not feudal lords optimizing locally; Defaulting to open collaboration, not to siloing;

not to siloing; Being a useful hub in the system, not a leader above others;

in the system, not a leader above others; Nudging in the right direction through goals and growth signals, not top-down planning and micromanagement;

through goals and growth signals, not top-down planning and micromanagement; Learning with failures , not assigning blame;

, not assigning blame; Facilitating alignment between functions and groups, not exercising power via authority;

between functions and groups, not exercising power via authority; Dispassionately adopting fit-to-purpose structures and methods, whether or not they are “by-the-book” best practices;

structures and methods, whether or not they are “by-the-book” best practices; Delivering sustainable systems and relationships first, business outcomes second, and outputs as a distant third;

and relationships first, second, and outputs as a distant third; Nurturing strategy and innovation wherever it happens, not compartmentalizing it.

Interestingly, much of this advice has become almost commonplace, as management thought leaders embrace the mantras of agility as a response to our VUCA world. Good references include Denning’s The Age of Agile, Worley’s The Agility Factor, and Chrystal’s Team of Teams. But the fact that the business, leadership and organizational transformations are intrinsically coupled seems to escape many, who still attempt to “make their organization agile” while sticking to the old ways themselves.

Co-evolving niches: the new strategy

Thinking about strategy in the new paradigm means retiring many of our military metaphors, in favor of biological ones. The business environment of the future, AKA the ecosystem economy, looks like a healthy rain forest, filled with intense diversity and fierce evolutionary pressures, but incorporating redundancies and feedback mechanisms to increase resilience. This means that the greatest opportunities won’t look like Warren Buffett’s economic moats so much as evolutionary niches. The difference is subtle but deep:

Niches are positive-sum. The organisms and the environment making up the niche are constantly sustaining each other, whether their relationship is symbiotic, predator-prey, or something else. Each niche can only exist if the organism is supporting the system.

The organisms and the environment making up the niche are constantly sustaining each other, whether their relationship is symbiotic, predator-prey, or something else. Each niche can only exist if the organism is supporting the system. Niches are co-evolutions. The organisms and the environment are also constantly influencing each other. Occupying a niche is embracing the constant change.

The organisms and the environment are also constantly influencing each other. Occupying a niche is embracing the constant change. Niches can’t be filled by mindless growth. Occupying a niche successfully means adapting to the present conditions, not growing out of control. In fact, excessive growth invariable creates an opportunity for predators and other feedback mechanisms.

Occupying a niche successfully means adapting to the present conditions, not growing out of control. In fact, excessive growth invariable creates an opportunity for predators and other feedback mechanisms. Niches blur the line between competition and cooperation. Interbreeding and horizontal gene transfer create an inter-species commons of applied knowledge, benefitting all organisms.

Now, moats can be quickly dug (especially if you don’t mind spending lots of money and making a mess), whereas niches can only be patiently evolved. So I’m sure we’ll continue to see companies throwing fortunes after old-paradigm strategies, including “walled gardens” that try to replicate ecosystem effects but in effect look more like industrial farms. But positive examples like open source, Android and IoT, and failures like Blackberry, are already making it clear that the new upsides created by the ecosystem economy cannot be exploited, only ruined, by traditional moat-building. Here thought leaders are also already calling the new game, but old habits and instincts die hard.

Conclusion: transition to a world of constant change

The torrents of economic value to be generated by the new paradigm are indissociable from the extra degrees of freedom it enables: using entirely new mechanisms of business and management to explore and exploit opportunities, at unprecedented levels of speed and flexibility. But to do so, people and organizations must undergo radical and holistic transformations. It’s less like a chrysalis than a tipping point, like the transition from laminar to turbulent flow.

The plume from an ordinary candle transitions from laminar to turbulent flow. Gary Settles, CC BY-SA 3.0.

The “new normal” looks nothing like the old order, requiring substantially new thinking and behavior. But there’s a lot to make this transition easier: tons of momentum, fantastic resources, and a large (and growing) body of models, examples and sources of inspiration, from places expected and unexpected. The transition is starting slow, but as with all such things, it will pick up quickly as critical mass is achieved, so it pays to be ahead of the curve.

The opportunities are enormous — but it takes humility and courage to rethink everything.