Survive Disruption By Harnessing The Thermodynamics Of Organizations

How can I avoid being disrupted by a 20 year old with no fear and a fast-growing platform? It’s a question plaguing many company leaders. I believe the answer lies in the thermodynamics of companies. Those who will survive disruption, are those who understand when to be fluid and when to be frozen. Both are very different but complementary organizational models which are inspired by the natural laws of thermodynamics.

Thermodynamic stage 1: Superfluid

Before I zoom in on this essential binary state described above, let me begin at the start. At the start-up, to be exact. Start-ups are magic. I know, because I was so lucky as to witness the birth of five of my own. Start-ups are all about creating connections between ideas until something emerges that no one has ever seen or thought of before. Node by node and link by link an entire ecosystem of entrepreneurs, business partners and customers is created. One which can crush a sector in a matter of months. Like Uber did with the transportation industry.

Start-ups are natural networks. They are fired up by creative chaos, experimentation and risk. Just like networks, they are complex, adaptive systems which are characterised by emergence (there is no master plan, they simply evolve), connectivity, coevolution, imperfection, variety and self-organization. Their organizational behaviour is a perfect match for their environment which has involved into a network since the arrival of the social web and the maturing of generation Z, as explained in my new book The Network Always Wins.

The quintessential characteristic of networks is their speed. That is what makes start-ups so dangerous. They are minuscule time-warps that keep accelerating, basically leaving all those at normal speed far behind. Typically you see this in the quintessential Silicon Valley start-up. With hardly any corporate structure or bureaucracy, these young firms can turn on a dime during that crucial period when they are experimenting with radically new propositions or products. The thermodynamic condition of a start-up is superfluidity: the ultimate form of responsiveness and agility in organizations.

Thermodynamic stage 2: Fluid

And then, if it is lucky, the start-up grows. It matures. It scales. It finds venture capital. Instead of experimenting and continuously moving forward in response to new opportunities, it starts to focus. The inevitable happens: it starts to slow down. It moves from being superfluid to fluid. Fluid organizations still change quickly, both in offerings and form. They can shape-shift their organizations with such flexibility that they can easily adapt to market trends and changing customer behaviour.

A fluid company is still amazing to observe. It makes sense of the signals that are coming from the market and responds to them in time. It can still look at technological or customer breakthroughs or trends and innovate at scale. Fluid companies are capable of running faster than the market. They might surprise customers with radically new offerings. They could shock competitors with market innovations that leave them gasping for air. They can stun financial markets with colossal upsides in growth, earnings or market share. They still leverage the flat, meritocratic and empowered structure of the network. They switch fast, like networks.

Centrica -owned British Gas, for instance, the largest U.K. energy company, which has about 10 million domestic customers, sensed a disruption in its industry. Newcomers like Nest started offering smart meters. Rather than continuing to optimize its services and concerning itself with “pipes and wires,” it decided on a start-up approach. British Gas introduced its very own smart-metering subsidiary, Hive. Not only did it recognize a shift in the market over time, it bypassed its own complex and slow corporate structure with a lean start-up approach. (source)

Thermodynamic stage 3: Frozen

Companies that keep growing find an operational model that fits them like a glove. One that achieves results and delivers cash flow. And then they freeze that model. They will aspire to become better at what they do, rather than at trying new things. They optimize operations, implement lean strategies, consolidate structures, streamline processes and harmonize synergies. Frozen companies become obsessed with bureaucracies, hierarchies, departments, committees and supervisory boards. Paradoxically enough, while the complexity inside their own company keeps growing – along with that of the outside world – their responses to these evolutions tend to become oversimplified and linear, wrongly assuming predictability.

Frozen companies want to protect their core business. Start-ups, on the other hand, have nothing to lose. They just keep trying and keep changing until they get it right. And when what’s "right" changes along with the customer – it always does – they do too. They are obsessed with customers. Truly obsessed. They are all they have. But frozen companies are addicted to their margins. That is dangerous. True, many frozen organizations are still incredibly busy. They are bustling with talented people who are executing on processes, serving customers, delivering products to the markets, and trying to make their operations smoother, more reliable, more productive and more effective.

Thermodynamic stage 4: Rigid

Yet, organizations that remain frozen are in danger of becoming rigid, a state of atrophy from which they cannot escape. They will become so sluggish that they focus more on themselves than on the outside world. They lose touch with their customer base and become completely narcissistic and introverted, unaware of the dynamics and chatter of markets. They become so passive, that they fail to evolve and eventually die. The only fate for a rigid company is entropic death. And soon.

One of the fundamental notions of thermodynamics is the notion of reversibility. Some processes in nature are reversible. They can be undone. Others are irreversible. They can never be revoked. Turning water into ice is reversible; you can melt the ice back into water. Turning sand into glass is irreversible; you can’t turn a windshield back into a beach. Just like that, in the thermodynamics of organizations, there is no going back from the rigid state. It’s a one-way street, ending in destruction.

Thermodynamic alternation

I believe that the companies that survive disruption are those which can cycle between fluid and frozen states. They are the likes of General Electric , Google or Eli Lilly . Frozen isn’t always bad. In fact, parts of an organization—perhaps even most of it—can be locked in to focus on a market mechanism that the organization understands really well. If core processes are optimized, this frozen mechanism can generate an amazing amount of profit and wealth. But if the organization lacks sufficient innovation liquidity, chances are that it will slowly and irreversibly become rigid. Like Blockbuster, which failed to react appropriately to the entrance of the likes of Netflix in its market. Like Kodak, which failed to recognize the disruptive power of digital photography. Or like Borders, which made the tragic mistake of underestimating what the internet would mean for book selling. If you’re trying to outsmart the competition, innovate to take advantage of new trends and opportunities, and be faster than the speed of the outside clock, you don’t want to be frozen alone. Business survival lies in alternation.

Superfluidity is the holy grail of larg(er) companies. It is not something they can actually go back to. It’s like baby teeth. Losing them is inevitable, but not bad. It’s just part of the cycle of life. Once you get past the start-up stage and grow, organizational sustainability is best attained through keeping the fluid-frozen cycle moving. Just as a large multinational cannot survive by being fluid and agile alone, it will start to slowly die if it stays frozen. The real trick is to be only frozen when you need to manage for the long term and for greater efficiency. And, at the same time, you have to keep parts of your organization, parts of its skill base, in a fluid state, while allowing room for experimentation, room for understanding the agility of the markets and room to innovate fast enough to outsmart the market. And that is how you survive disruption.

Read The Network Always Wins if you want to leverage organizational thermodynamics and understand how the age of networks will impact your company. Or watch The Thermodynamics of Organisations here.