Learning From Volcanic Ash

Monday, April 19, 2010

The Strategic Learning process stresses the importance of sense-making in an uncertain world. It is an insight – to – action model, a “sense and respond” approach to strategy creation. Embedded in the process is a critical starting point for all strategic decisions, a technique I call a Situation Analysis, a systematic way to generate insights as the platform for informed action.

Let’s apply this technique to the current volcanic ash crisis.

To start with, this is a jolting reminder that not everything that happens to us can be predicted. Revolutions are happening all the time, and there are two kinds: gradual revolutions (e.g. the rise of Asian purchasing power) and sudden revolutions (e.g. the recent economic meltdown). Nothing stays the same. At the end of the day, both kinds of revolution can be equally disruptive, but discontinuities of a gradual kind at least afford the time for more deliberate reflection and stock-taking.

The volcano in Iceland and its devastating global effects is a classical example of a sudden revolution. No one predicted it; and its implications have been far reaching, surprising, and very revealing. It has essentially laid bare the nature of our intricate, interconnected global system, how it works, and what its vulnerabilities are. It has reminded us that some of the elements we take for granted are in fact critical dependencies, and that we need to understand and manage them more explicitly. This calls for systems thinking – applying the power of synthesis (seeing vital connections), rather than pure analysis (breaking things down).

The way I view it, this crisis has demonstrated how the effective functioning of the global social and economic system has become crucially dependent on the unrestricted movement of three elements: people, things and information. A breakdown of any one of the three elements compromises the total system. It is, in its characteristics and behavior, a classical ecosystem.

The first part of the drama was all about the movement of people – stories of people stranded, separated from family, unable to attend weddings (sometimes their own) or funerals, or business meetings or sports events, people sleeping at airports, running out of money, suffering from the anxiety of not knowing when things will change, not being able to plan ahead in the usual way. The breakdown in the movement of people is sure to have some economic impact based on a loss of productivity, but the main effects seem to be delays, inconveniences and social costs.

The second part of the drama started to highlight the problems associated with the inability to move things (at least at the speed we were reliant on). Stories emerged about flowers and fruit perishing in airport warehouses, then of shortages of various things, including medical items. We began to see the vulnerabilities of supply chains being operated as global “just in time” systems. We can imagine the calls to FedEx, DHL or UPS from operations executives demanding action as their factories are halted by the stoppage in the overnight flow of materials or parts. We are starting to see the frustration of consumers who are not able to buy the end products of this supply chain. Perhaps the biggest and most immediate impact is on the airlines themselves – when they can’t move, they cannot generate any revenue at all. By one estimate, they are collectively losing $250 million for every day they are grounded. If this goes on for much longer, some of them will run out of cash and collapse. The economic damage from the inability to move things in the usual way could prove to be major.

The third critical element for the efficient functioning of our global system is the movement of information. I have just spoken to my son, Chris, in London. He is in the private equity business and has to move almost constantly around Europe and the Middle East. In the immediate future, that is likely to be impossible, so he has developed contingency plans to communicate via telephone calls and video conferences. This greater reliance on IT during this crisis is likely to become a pattern for business people the world over. But herein lies our most serious vulnerability. Chris, like the rest of us, is simply taking this IT capability for granted. But what if our information and communication system breaks down? Just look at what happened during that 2003 electricity blackout in the NE of the USA. Much has been written about “cyber warfare” or the wanton damage that can be caused by a talented hacker – for example to our military or banking systems. It’s a scary prospect.

It is reassuring to know that while volcanic ash can stop the efficient movement of people and things, it cannot stop the movement of information, and that we can rely on the movement of information to help offset stoppages in these other two elements. But it is also a chilling reminder of the potentially catastrophic consequences of compromises to our IT systems, and of the dangers of reducing our vigilance on protecting its integrity.

So we come full circle. Not everything can be predicted. Sudden, unexpected shocks are part of the game. Our task is to build our readiness -- our capacity to respond, learn and move on.

Our ultimate lesson is that our ability to deal successfully with an unexpected crisis is a direct legacy of how we manage our organizations and ourselves in good times. When we are in the midst of a crisis, it’s too late to try and build resilience. Managing successfully through a crisis involves drawing on the reserves of strength we have built up over time. A good example is ExxonMobil. That company is always strengthening its fundamentals of safety, operational efficiency, risk management and investment discipline in good times and bad. When oil prices spiked and then dropped dramatically in 2007/8, ExxonMobil took a temporary hit, but continued to out-perform its main competitors. It was simply more resilient. Consider the mounting of a Broadway production. There are months and months of rehearsals, and then a day of rest the day before the opening. By then it’s all in place. How well the production does, how well it copes with mistakes and setbacks and recovers its poise, is all a function of what went before.

As Aristotle taught us, “We are what we repeatedly do. Excellence is not an act, but a habit.”


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