 For our next session We're gonna hear from Barry Lynn who's a director of the markets enterprise and resiliency initiative So he owns the R word here at New America The initiative here at New America. He's the author of end of the line the rise and coming follow the global corporation Then we're gonna hear a presentation from Rob McNich who's a principal of corporate finance and strategy practice in McKinsey and company they're gonna have two Very different talks and then followed by a short conversation with Maddie Glacias Who was the business and economics correspondent at site magazine and the author of the recently published the rent is too damn high we have put on on this segment the The title for this is resilient capitalism how to thrive in the face of disruptive change and that will encompass both presentations in the conversation and I should just I should just note that this was something that we did in kind of editing today's program So it's not the title for each talk and I think Barry and Rob might be quick to point that out and so Their conversations will take us in different directions and I now present to you Barry Lynn. Thanks. Thanks, Andres and Thanks for all you to comment out today and This is a I've been working on resiliency for about 10-12 years and it's somewhat of a different take than some of the earlier things you've heard today because it's kind of looking at resiliency in terms of Systems terms of engineered systems and sort of they get a sense about actually what Talking about I think it helps to sort of start out by looking at a couple of engineered So systems which are ships and And Now the first ship is a ship that was launched in about 1858 and it's a ship that was called the Great Eastern And this at the time was the most advanced ship anyplace in the world It was and it was also it was told it was said to be unsinkable It was built with a double hull it had a stem to stern bulkhead deck it had three modes of propulsion and It Turned out to be actually unsinkable in about 1862 that ship hit a rock off a Montauk point That even to today that rock is called the Great Eastern Rock and that rock ripped a hole 90 feet long and about 10 feet wide in the hole of that ship and That ship stayed afloat. They got it into port. They fixed it and spent another 30 years going back and forth across the Atlantic laying cable The other ship you may recognize was launched about 50 years later. That's called the Titanic Now you know that they left a few things out of that ship Such as you know, there weren't quite enough Lifeboats on that ship. They also left out the double hull and they also left out the bulkhead deck You know the thing about when when Ballard's crew got down to the bottom of the ocean back in the 1990s And they looked at the the hole of this ship One of the things they found out is that Unlike what people thought they were gonna find there was really no gas It was just kind of an area on the on the front part of the ship where the plates have been buckled The actual amount of the hole was about 120th of the total space of the the hole that had been ripped in the in the Great Eastern Hall the water had come in Not in a huge rush, but it kept coming in and the problem was that the first ship had 14 different compartments Titanic also had compartments, but the top ship had a bulkhead deck That means every single compartment was enclosed the bottom ship the Titanic It got rid of that bulkhead deck So when that water is come seeping in through the front of the ship when it got to the top of the compartment It spilled into the next compartment and then it spilled into the next compartment and all of a sudden that ship just went straight down to the bottom the so the lesson is that in the first ship in the Great Eastern a Disaster in one place It was built so you could keep that disaster in that one place. You could localize that disaster That ship was a resilient system Second ship disaster in one place because there was no ability to localize that disaster becomes a disaster every place That is not a resilient system So anyway, I mean really you know human beings are actually pretty good at building resilient systems You know we do it with and you know resilient system is something that you know you it's when there's a shock You're able to dampen that shock you're able to distribute the shock you're able to compartmentalize the shock You're able to localize a disaster. You know we we did it with with electrical systems. We have circuit breakers We do it with large jets. We have multiple engines on those jets. So something goes wrong. You got another engine We do it with flood control not so well and and perhaps in New Orleans, but pretty well most everywhere else we do it with The internet that's actually this is a picture of resilient systems. This is Paul Barron's Sort of draft of a picture of what the internet might look like this is from 1960 So we're pretty good at figuring out how not to put all our eggs in one basket But not always So just to sort of figure I see it how sometimes we don't do a very good job of distributing risk I'm gonna tell a story about what happened after an earthquake in Taiwan in 1999 and in September 21 of that year The it was actually a pretty big quake. It was about seven point six magnitude killed about twenty five hundred people but What you know, that was on the other side of the world What was interesting is what happened after that which is just a few days later in the United States All these factories suddenly shut down as it turned out the reason that all these factories in the United States suddenly shut down is because That part of Taiwan there was actually a Town about an hour outside of Taipei called since you and then this time to send you turned out that almost all of a certain kind of semiconductor came out of that one town And they'd stick it on airplanes. They'd fly it across the ocean and then put it into all those Computers and other products and all those factories all around the United States So what happened luckily that town was not affected by the earthquake What happened the earthquake knocked out power to the airport couldn't fly the ships in and out So within a few days the system went down the Sort of to understand what this meant though what this was What we had is a single point of failure So that when you lose that when there's a failure at that one point You lose the whole system so the system that in which products are moving around in which component a is Connecting to component B to component C to component D and then at the end of the day All of these nations have the product suddenly you get to a point where it doesn't happen you no one has the product and But anyways like what we saw back in 1999 that was the world's first industrial crash So and unfortunately it was not the last crash we saw Seizures of industrial systems after September 11 We were paying attention to something else at the time But what what also happened during that just in the days right afterwards is that a number of industrial systems Essentially ground to a halt. We saw it during the SARS epidemic in 2003 there were major disruptions and in supply systems there were In 2002 the Indians in the Pakistanis were threatening to throw nuclear weapons back and forth at each other one of the things that companies like GE and City Bank realizes that all of that capacity for processing information that they've stuck down in South India if there's any kind of event that would take these two nations offline They don't get to import that information anymore in real time and that means that companies like GE and City Bank might go black for at least a period of time The most dramatic Industrial crash happened last year. This was after the what the Japanese called the triple disaster which was the earthquake and the tsunami and then the Fukushima sort of nuclear disaster now the Which important to understand sort of the magnitude of the disruption of from this this industrial crash you know in You know in in Japan most of the industry in the country is located in the south and Placing around Osaka and and then further to the to the west Up in the north where this happened. There was very very very little industry yet what we saw is Truly phenomenal. This is a drop-off in the amount of activity in the industrial activity production activity and In the period right after the quake now this compares there was a very to understand how the world is changing in 1995 there was a very devastating quake right in Kobe in the heart of their industrial area and What we ended up with at that point was a relatively minor at the time seemed big But it was about a little you know 3% drop and Here we have a quake Way to the north way outside the zone of Central production and you have a truly massive blow to the system the You know just to I just want to emphasize it's not only you know sort of these hard industrial systems electronics what we see is Well, actually just going you know just so we understand the Japanese quake The other thing that we saw from that is that It was a synchronized event in multiple countries that we saw that you know what we just saw here That's a drop-off in activity in Japan at the same time that happened. We saw really Significant drops in activity and pretty much every industrialized country in the world in North America in Europe and this is actually a quote from a Reuters Article at that time and what they said is we've seen a remarkably synchronized worldwide economic slowdown due to this event and then at the same time is like here's an event again, it's on the other side of the world and Here in the United States the result was and this is another quote. This is about three months after the event This was it from a an article that came out in early June of last year The Philadelphia fed sees the largest three-month drop ever in production activity This is because of an event on the other side of the world So it's not only heavy industrial It's not only electronics but One of the things we've seen is that say vitamin C Which is also called a scorbic acid. There's the number of Products of components that Where you know like that chip that was in Taipei in Taiwan and Senju the number of components where we see massive Concentration of production of capacity in one place Every day seems to the list grows longer every day Vitamin C which is also called a scorbic acid. It's something that we put into pretty much every packaged food in the United States We use it to preserve the foods the Vitamin C was a the the molecule was first identified by an American scientist It was first synthesized by an American scientist It was first mass produced by an American company today 100% of the vitamin C that we use in this country comes out of China If any break in supply we don't have this thing that we use in all of our packaged food systems Drugs the chemicals that go into our drug systems I mean the drugs are often manufactured here, but the actual chemicals 90% of those chemicals come out of China DRAMs 70% of the DRAM factor you think people might have learned something from the Taiwan quake in 1999 today About 70% of all the DRAM production is located in and around actually usually essentially in one place outside of Seoul about 30 miles from the DMZ What could this mean it would mean if a large disruption potentially catastrophic disruption it would mean potentially Huge hit and in the number of jobs that we have here But it could also mean obviously disruptions in our drug supply systems disruptions in our food supply systems This medical masks the after the SARS scare of night of 2003 I have a friend out in in Minnesota named Michael Osterholm. He's an epidemiologist Minnesota is also the place where yet 3m so He went Michael Realized that there was something here even though he's at epidemiology realized that the Disruptions of these systems could be actually a bigger problem than the sickness itself and to prove this to himself He went and he knocked on the door of 3m and he said well, how do you make these masks that we rely on? and What they said as well, you know, this is actually a beautiful thing in the old days We used to have this big pile of raw material then we had a Factory in which you had these machines and series and then at the end we had a big warehouse with all the stuff ready to go Months of supplies sitting in one place and now what we've done is we have transformed the system. It's all lean It's all just in time. We bring the components in from Asia We put them together a lickety-split. We ship them out Immediately, there's no waste any place in the system and then Michael asked these guys as well What if there were any break in the supply of goods coming from Asia say because of SARS? Because people are not allowing these planes to fly back and forth and these people who actually make these masks that you know We actually have never thought about that You know, it's it's not only industrial systems Big and small. It's also Banking, you know, you've heard about too big to fail to integrate the fail, you know It's essentially the same flaw and principle that we see in the banking system with the we also see it in monetary systems The European monetary system right now. We're dealing with this a situation in which the adoption of the euro By multiple countries has eliminated all the flexibility all the resiliency that used to exist in that system We're people to adjust to meet different changes in the in the economic and the economic performance so Why are some systems less resilient than others, you know, is it something to do with the nature of the system? Is it perhaps something to do with you know, something that's inherent in the character of capitalism or Is it something else? You know, what I'm gonna do here is I'm gonna jump ahead to write straight to two answers and then I'm gonna explain why these two answers fit and the first answer is monopolization and This I would define as when people use the business corporation to capture control over some activities some production activity in this case and then They often in the process of capturing control over that activity. They will concentrate actual capacity in one or a couple places the other answer is recantilism and recantilism is Essentially when people use the corporation that we call the nation-state to do the same thing as people use the private business corporation to do Which is to capture control Exercise power ways that allow you to capture control over some activity and Often to concentrate that capacity so the reason So you end up with all of one thing in Xinzhou and Taipei all the DRAMs near soul so You know just now is to explain exactly how this happens. I was gonna really very briefly look at Sort of the nature of the industrial system this old structure the industrial system this here is like sort of a Depicts how the automotive system looked around 1990 it was vertically integrated each corporation Pretty much did everything underneath it every corporation had its own meant windshield wiper manufacturer its own manufacturer of alternators etc etc By say about 2005 outsourcing Every one of these companies had broken apart from their supply base and In the process of breaking apart from the supply base They basically left their supply base open to those who would concentrate control over certain activities So now in some cases we have two companies that dominate the worldwide production of windshield wipers We have two companies that dominate the worldwide production of piston rings as opposed to having Five as I saw there and actually maybe more like 20 in reality Industrial this is Sort of a picture of industrial nations Cirque in 1990 the industrial nations circa 1990 were vertically in you had these were vertically integrated those were Systems to make cars Most there was not a lot of movement of product of components from the United States to Japan or to Germany and then what we have now is this and what you the difference between 2000 I mean 1990 and 2005 is We have saw What was called offshore? Which is the breaking apart of the vertically integrated nation state? so and That of course leads to assist a system that functions like that So anyway to end up The Some systems are less resilient than others because they are poorly engineered Or actually more accurately in the case of these systems that I'm describing. They were really never engineered as systems Even though they are systems Now the reason that we have this Bad engineering this bad engineering is essentially a function of bad politics bad political decisions and I'll just you know There's a lot of bad political decisions we made in this country and around the world last 30 years I'll just name two that are directly pertinent to the systems that we're looking at 1981 we essentially got rid of antitrust in this country for 200 years We had antitrust for better or worse and I had a monopoly law 30 years ago. We got rid of it No one has looked at how that affects the functioning of these systems other change 1994 The approved that sort of the approval of the general agreement the Uruguay round of the general agreement of terrorism trade Which led to the WTO? that took 200 years of Experience in terms of using Your border to distribute your reliance in other countries and threw it out the door It opened the door to radical concentration of power Over certain activities by the Chinese also by the Koreans also by the Taiwanese increasingly by the Germans those two political decisions probably more than any others allowed for a Few people to essentially put all our eggs in one basket or to create these single points of failure The result, you know is essentially we have we now are dependent upon a an industrial system that is Not resilient It is brittle and it becomes more brittle every day It is built to break and just so we know what we missed in terms of our opportunity Back in the 1990s when we began to offshore when we began to outsource We could have exercise power Mind upon those processes in ways that would have led to a far far more distributed system a far more resilient system Where a shock anywhere we could have isolated it and localized it instead We now have a system that is built to transmit shock Instantly and even to amplify that shock So this you know, I gotta move on here, but solutions Don't have time for the solutions. You'll have to come back for that yeah, but Yeah, there are solutions, you know and actually the the good news is that they're actually relatively simple and But they're entirely political in nature Anyway, thank you My name is Rob McNich. I'm a partner with McKinsey and company based in Washington DC and based on the other topics here today I would call myself the knuckle dragging mouth breathing capitalist in the crowd And I'd like to talk to you from our experience in how Corporations are or are not resilient in the face of what we would call disruptive change not the normal everyday pace of change But things that really require a corporation to respond dramatically if it's if it's to be successful I guess I've got the control here So first not to belabor the point but many people believe that a number of global forces have increased or accelerated the pace of Change or the number of events of dramatic change that impact corporations among them globalization some of the things that Barry talked about technology and innovation liberalization which he all talked about higher velocity faster cycle times and a profound distribution of fortune between winners and losers winner takes all And concentration as he mentioned and therefore brittleness in the in the system a chart I don't have but would have been a nice Complement to Barry's discussion is one that we other people can't call the great moderation and sort of the reversal of that a Period of about 20 25 years from roughly the end of the 80s until the early 2000s When we as a as a neck as an a global economy experienced Inherently lower volatility you almost look at anything volatility and commodity prices volatility in distributions of market shares volatility in stock price movements they all moderated during that period and many of the trends that that Barry was talking about were Exploited and and pursued during that great moderation We made supply chains more brittle. We made business models more brittle Largely in economic response to a lower cost of risk from this great moderation of risk risk is now back If you look at the at the charts the great moderation has reversed itself to more normal Historical periods and those decisions are looking less wise now when those decisions were being made many were made Unconsiderately others that were made on a considered basis were made in the context of lower volatility and they made sense at the time I'll pursue slightly lower average costs In my supply chain and and supply network because the risk of failure is Is smaller or less expensive now that the risk of failure is larger and more expensive those decisions look poor And that's why you see people talking about bringing things back home right to manufacture here And why you see in our supply chain practice more and more people Requalifying second and third and fourth suppliers whereas before they had concentrated their supply in one person So people are reversing these decisions slowly and painfully over time I'm going to take it up a level though and talk about overall corporate resiliency and this chart represents a fairly simple analysis of How resilient or how sustainable leaders are in their industry over time and the chart depicts the percentage probability that a company in the top fifth of its industry in One in one year five years later has lost that position of being in the top fifth and in 1975 If you were in the top fifth of revenues in your industry in 1975 You had roughly a an eight percent chance five years later of not being in the top fifth Relatively modest turnover in the top quintile of companies in any given industry More recently 90 if you were in the top quintile in 1997 at the right-hand side of this chart You had more like a 30 or 32 percent chance of not being in the top quintile five years later so this is there's many ways of Describing the same phenomenon, but the turnover rate the churn rate of successful companies Has dramatically accelerated over the last 30 years or so you see this in members of the S&P 500 Members of the doubt third one out the death 30 is pretty stable, but you see a lot of a lot more change Why are few successful companies able to navigate what we would call disruptive change most of these answers are pretty straightforward They respond late either because they don't see it or they're calcified and can't react to it It's tough It's hard to know what to do if you see it and want to respond sometimes It's hard to figure out what to do and there's a lot of uncertainty in making the change and a lot of internal conflict in organizations Often we find companies making incremental responses the frog and boiling water problem Oh, the I think this water might just be a little warmer. Let me respond a little bit But I actually know it's it's going to boil and you better move quickly and sometimes you just made bad choices, right? you don't know you choose to move in a certain direction and It was wrong Let me move toward the realm of answers when we synthesize our research around navigating disruptive change Successfully it tends to the answers tend to fall into three categories for us from a man from a manager's point of view The first I'll call refocusing the portfolio and the message here is that strategic insight matters and Strategic bold leadership matters Seeing what's happening Figuring out what's going on figuring out what the possible responses are to it and then acting boldly is a big key to Adapting and being resilient as an organization so this is you know the value of the of the team at the top of reaching strategic insight and making a big move and Being bold and it's refocusing of resources which in a corporate environment is very difficult to do Because reallocating resources means calling winners and losers and that means Resisting an organization that doesn't want to be on the losing end of the resource reallocation Second Effective response comes from what we would call transforming the core This is about fundamentally changing the business model and the way things Operate today in your core businesses and here are the key messages around organizational structure and organizational complexity and organizational resilience, and I'll give you an example of that shortly the third Factor in success is what we call building new businesses. Well in response to change things are going to die and If you just let it happen to you in pieces of your business die And you don't replace it with new things then the organization slowly dies and you end up in a downward spiral so an organization's ability to Accelerate its pace of growth and innovation and newness is a really big part of responding to disruptive change It's sort of realizing that some things are going to go away And I need to replace them and as an overall entity if you don't replace the things faster than the things that are going away You die And here I'll talk about the importance of culture people and incentives And let me do some of this by talking about a case example of unilever and proctoring gamble So let's bring it right down to selling soap And and talk a bit of I'll focus my remarks mostly on proctoring gamble because I hate talking about companies Negatively and proctoring gamble is the positive part of this of this battle Let's talk about the late 1990s a number of things that were hitting the consumer goods sector particularly in the product categories represented by P&G and unilever There were proliferation of brands trying to share the same the same pie Consumer goods companies noticed that brands mattered that differentiating brands allowed them to price Differentiate and therefore they proliferated brands, but it led to tremendous amount of complexity and cost and potential confusion in the system Most importantly the second Chevron here channel power was consolidating Retails retail was consolidating the rise of Walmart was creating a player in the supply chain that had dramatic power Over players like P&G and unilever these companies were traditionally used to using Retailers as rented space is sort of the business model it the the the hierarchy of power changed and Walmart became you began using P&G and unilever as suppliers So the balance of power in the system fundamentally changed through consolidation and the success of the Walmart business model We're evolving consumer needs. I won't belabor some of these Shift away from traditional media right the internet moving away from normal modes of advertising broadcast television and print And then we had obviously some investor concerns or Considerations around who was getting capital who wasn't getting capital while the dot-com boom was going companies like these were not getting capital And then when it bust no one was getting capital In response to these changes unilever and P&G both launched growth programs right they saw it They were their bottom or the top line was coming down sales were actually falling for the first time in a long long time And their stock price was getting hit dramatically It got the attention of the executive teams and both of them said ah, we need in response to this We need to change and we need to grow both developed fairly sophisticated growth programs and then launched them in 2000-2001 and Unilever called there's the path to growth And P&G called it their organization 2005 campaign. They were fundamentally different in nature the unilever approach Was biased toward improving the profitability of the current business and The P&G approach was wired more in the in the vein of creating new capabilities and making the organization more flexible More complex but but more flexible both were directed at trying to regrow the organization But their approaches were quite different I'll dig into P&G a little bit So this is a P&G chart. I didn't put the logo up. I forgot Back to that refocusing the portfolio What this chart represents is the mix of revenue in the P&G portfolio by division or by product line from food all the way down to healthcare and How that evolved between 1999 and 2005 now if you draw this chart for a hundred random companies in the S&P 500 You usually find it to be a lot more static than this This doesn't look like a lot of change but in a corporation as large as P&G This is a dramatic amount of change in terms of what parts of their portfolio are Are growing in which parts are shrinking this represents a very bold top-down Executive initiative to say we're gonna double down in beauty care and health care And we're going to de-emphasize food and baby and family and fabric and home care Those are very difficult decisions for corporations to make and this is very bold This was top-down leadership And it was AG Laughley AG Laughley was named chairman right around this time In fact, it was his plan went before he was CEO and chairman that was put into effect As as CEO and chairman in fact his his plan got him the job and His approach to doing business was appropriate for this time He's a bold strategic decision-maker and he said we need to make clearer the tough strategic choices and act on them focus on Leading brands and focus on leading products and focus on leading countries So he he said we're doing an awful lot of stuff. We need to focus on where we're winning And that was a difficult strategic choice to make because it created a lot of losers in his organization people who didn't get the resources Shifted mix focused on big countries We talk a bit about organization Now this I don't expect you to care about this chart But what what it means is on the left-hand side you see a bad representation of a classic matrix organization structure It P&G had a matrix organization structure and if you've ever lived inside of one, they're enormously frustrating They are expensive. They are slow. Sometimes they are wasteful Accountabilities are overlapping right but in the face of dramatic change it worked the organization structure here has Regions to it. It's got product lines to it and it's got functions to it think of a three-dimensional cube with those three dimensions as As the as the organization structure Unilever had a classic largely single dimension organization structure with regional Operating units and then sub regional operating units within it and then product lines Were were embedded within that but in the P&G structure product lines Geographies and functions were all at the same level of the organization battling in a matrix and in in Unilever. It was a lot more lockstep Hierarchy of region down to sub region than down to product The P&G model proved much more resilient in In this time period because there was a lot of uncertainty in it the or the matrix model forces Cross-functional collaboration cross regional collaboration and a lot of discussion among managers before they decide what to do And that led to better problem-solving and better direction setting The result was pretty clear over the subsequent five years after both those programs were launched P&G grew at 6% Unilever shrink and TRS is the total return to shareholders This is if you had invested a dollar, what would it be worth now in P&G would have experienced a 6.2% per annum return in Unilever you would have lost 4.3 percent a year over this five-year period So the results were pretty stark in the different approaches Now the good news for Unilever is is that it's a intelligent Capable organization, and they realized within about four or five years that they needed to Re-change the approach and they adopted in 2005 an approach that wasn't exactly like P&G's But it had some of the some of the same elements a lot more Focus calling of winners and losers shifting of resources and major changes to the organization They'd increased the complexity of the organization, but but made it more adaptive and more resilient Those are my charts well So yeah, thank you for two great great presentations You know I thought I would I would kick this off just just by asking Barry would seem like the Obvious question to me watching watching that presentation is that you know We can we can see clearly that there there are some problems here that there are some downsides to concentrating your supply chain But why is it that we shouldn't just assume that that companies corporate leaders will be able to look at this See well, you know, what's the cost involved in diversifying my supply chain? But what's the benefit and kind of make the shift in response to these kind of events you're talking about You know, I what is the what is the political problem here as opposed to simply a corporate strategy problem for for business leaders to Think through on their own terms that's a great question in the That's what I've been dealing with for 12 years now and the And there's a because what we have here is essentially a million Rational decisions, you know a million people going out and doing exactly the right thing according to The environment of law in which they find themselves and then it all adds up to a system that if you step back and look at it from the point of view of society as a whole is Is grotesquely Is engineered And so The the you do have a number of people who do make wise decisions You have some companies that are you know as Rob is saying are making this effort to You know find the second find the third find the fourth a supplier to force those suppliers to distribute their their production But there's there's actually two problems with this a lot of the most one most of these a number of these Efforts tend to run out of steam after a short period of time And I spent the summer of 2008 in Japan And I was looking at the effects of an earthquake that had taken place the previous summer in a town called negata In which a single piston ring company got knocked out So I spent a lot of time talking to Toyota which dominates that system and I spent a lot of time talking to the folks at reken Who are this the the producer and so? Recon kept telling me well Yes, they tell us that we have to spread around our machines, and it's easy to spread around the machines These these machines that you make a piston ring with are about this big You could put them all under one roof or you can put them under ten roofs or a hundred roofs It's just a matter of cost so they said they keep telling us that we have to move them around, but they keep cutting our Profits so that you know, they're giving us two very different Messages here, so you know so Toyota even now Toyota saying we're gonna dual source triple source everything We're gonna remake the whole system, but I can tell you that that is actually not happening in Japan so In fact, you're actually seeing more concentration in certain areas Such as the chips that go into cars And actually the one of the things that this is really a complicated issue But it's really quite simple if you look at it is that it's it's the issue of competitive risk if I am At the top tier companies the OEM that are buying these supplies They look at each other and it's like what is the the the horizon of risk if I make a bad decision Today a year from now I'm out the door. I personally the CEO of of Unilever mount the door if I make a bad decision So if I invest per you know in my company making my company more resilient Well, if there's no event in between now and a year from now, I don't win the fact I've just added a cost with no benefit So unless the state comes in and basically makes this even it sort of sets a set of rules You're not going to have any of these companies making the proper decisions on their own. They cannot do it Right that that's my question for you is our our financial markets and investors prepared to Sort of have the patience that would be required for resilient strategies to pay off. I Believe they are But it depends very much on the credibility that the management team has with their investors and that's there's a broad spectrum on that Managers who have a lot of credibility with their investors can carry the day in making decisions that are right for the long term and are right for Decisions on a risk-adjusted basis rather than just a near-term basis Managers who don't have that credibility end up falling into the traps that the barriers describing I think corporations are not particularly good at making risk-adjusted decisions because of the way their incentives are organized investor Response just being one of those They make good expected value decisions, you know and things like purchasing departments are notoriously Held accountable for 2% year-on-year reductions in cost on an expected value basis if they're making a risk-adjusted Decision they would recognize that over the next 10 years this 2% that I gained by making my supply chain more brittle Would come back and cost me 20% in year 7 and if I factor that probability in then I wouldn't do it Right, but they're not incentivized that way The second thing I'd say that organizations have had a hard time with is this great moderation I was talking about Matured a generation of executives who were used to making decisions with relatively benign Uncertainty environments and they're really they're having to relearn how to make decisions under uncertainty Well that actually I'm glad to use that word because Another question that that occurred to me is you know We draw a distinction or people sometimes do between between quantifiable risks and unquantifiable Uncertainties and and to an extent I mean I wonder which is it that we're that we're talking about here I mean, it's it's one thing to ask companies to manage You know known risks, but but it's another to deal with the Well the the existence of uncertainty in the world that there are things that are sort of outside of a corporate planning horizon it seems to me It's true And then you enter into the realm of managerial judgment, right, which is what makes Organization structure and culture so important because no one no existing management team nor individual on the existing management team By definition knows what's coming down the pike and so it's it's about initial response and then organizational Humility and and culture to to say who our first response isn't necessarily the right one How do we learn from that so learning organizations more effective than than hierarchical organizations? You know, I You know, I actually think that the way the system set up right now. It's it's extremely unfair for the Well-meaning corporate executive. I mean I spent the reason in my early days of figuring out what was going on here I was guided in what I was doing by executive CEOs and large companies in fact who understood that the system was incorrectly engineered And You know, they were very honest about it They were gone into Washington knocked on doors what we see here is a failure of leadership in Washington what we see here is a failure of leadership, you know of the willingness to actually open the door and And and hear news that is not Pleasant and to face up to the fact that some of the systems that we Run like the trade system that you know that you might some of these decisions that we made 15 years ago were wrong So, you know, it's I think that you know, it's this is at no point Is this a situation in which the corporate executives are the villain? To the extent that there is a you know, people are making bad decisions. It's not at that level So can you tell us I think you you got cut off for time reasons But you had a slide which had headshots of some some famous politicians What what was what were they about? Oh, that was a number of politicians who are essentially small our Republicans they repeat, you know, these are if you go back to the beginning of the United States You know the the the Tea Party actual Tea Party What was a Tea Party Tea Party was not really about taxation if you go back and look at what happened Tea Party was a rebellion against monopolization of commerce in this country by the British East India Company So we were born out of a rebellion against monopoly and that rebellion has been Fought many many times since then so those were those people up there were where some of the leaders who had have stood up against Concentrated power, you know first one on that list was Madison on that but in the last one was Eisenhower who as you remember in his farewell address talked about the dangers of the the military industrial state so The if this is a case in which what we saw one way the way I look at what happened in the world is essentially 1981 there was a form of coup within the political economic regime that we used to govern this country govern political activity of economic activity in this country and a system that had been designed to distribute power was overturned in favor of a system that celebrates efficiency for most and Therefore not only turns a blind eye to monopolization of concentration, but actually celebrates it so What we have now is you know So those are the if we go back to what we did well for 200 years I think we'll go a long ways to fix in this problem So I mean I think it's indisputable that we are seeing more concentration in some respects more more winner take all markets But at the same time you showed a slide illustrating more more instability So I mean I wonder what I mean what do you think about about this idea that there's a monopolization? well, I think that there's always a Tendency toward monopolization what we're talking about is is how you safeguard against it right and the tendency is economic The tendency is that it concentrates rent in the system to the person who achieves the monopoly power And and so there's there's always that motivation and many markets function well because it's Virtually impossible in competition to achieve that others it's much easier to capture And where it's easier to capture. That's the role of of antitrust I think that that you're right the chart I showed is that the guys on the top get toppled at an increasingly fast rate I think that's that's a result of some of the forces. I was describing that make it More important to adapt and be flexible in large corporations are not inherently about adaptive Adaptability and flexibility there about driving a winning model right home and around the world and across products And those organizations are not really that flexible and I think what what we're what I showed was that when they're not they lose I mean Is there a winning model for companies that are trying to preserve Flexibility in the face of that kind of disruptive change. I mean is that is the moral of that? Png unilever comparison that that they have the right kind of corporate structure or is it that? Faced with disruption Random factors prove to be beneficial in ways that you can't predict so I'd come back to sort of was harping on Insightful strategic leadership. This is why some CEOs are worth every penny they get paid because Laughley was Some I know there was luck or skill on the organization structure The they happen to exist at that time with an organization structure that was better able to adapt to the things that hit them It was a cost the organization structure to maintain who knows whether it was a good cost benefit before the events happen It was certainly good cost benefit Benefit after and I do believe in in in culture And organizations willingness to see Talk about and do something about risk without becoming parochial or defensive is a really big deal You know, I I mean I'd agree up to a larger to a large degree the what we Corporate executives can make their Their companies much more resilient Up to a certain point at which point they you're you're dealing with a system that is not resilient in which case everyone goes down There's a famous case that sort of proves this ago. There was a it was There was a fire back in 2000 in a semiconductor plant in New Mexico that was run by Phillips There was a radio frequency chip that that Plant was making that was had been promised to two companies one of those companies called Nokia the other was called Erickson the When that fire happened, this is the only source for of production for this radio frequency chip chip When that fire happened Nokia had a plan and Nokia moved fast Erickson didn't have a plan Erickson kind of sat around waiting for Phillips to fix the problem Nokia ended up with a little glitch in production. They got the little bit of space that was available at a different plant That was run by Phillips Erickson ended up with a $500 million plus shortfall that year they ended up the next year selling out their production to Sony So it's like if you companies Executives absolutely can plan for shocks, but there are certain shocks large geographic shocks Political shocks that no one at this point can plan for You know, I want to ask also about your presentation How much of this really has to do with political decisions that are being undertaken in foreign countries that a lot of Asian You know mercantilist development strategies seem to lead to to product specialization and intense clusters in a way That's perhaps out of our hands. No, that's actually one of the things I was gonna say is there's another limit out there There's a there's a resistance anyone who wants to make their system more geographically resilient Like if you're sourcing all of some component It's all coming out of South China and you would actually like to move half of that into say Taiwan You may run up against the state power that does not want you to do that, which is that you know in Beijing now So but it's a big China is not the only mercantilist actor out there What we've seen is sort of since and here since over the last 15 years you've seen All of these countries the major trade Industrial kind of countries of Asia go out and grab hold of certain components The Japanese are very good at this the Koreans are very good at this the Taiwanese are very good at this and Once you have it you do not let it go unless another state is telling you to do so so But I mean so this I mean it seems to me It's a it's a tension in in in what what you've been saying that I mean part of the the rationale for the The sort of global trade paradigm that we're moving to is precisely that those kind of measures are Destructive, but that no one country wants to give them up and that if you have a multilateral framework Towards sort of dismantling these sorts of things that in fact that Would be how you would get to a to a more resilient dynamic as opposed to the United States Just sort of getting in on the game and grabbing our own particular corner of the supply chain. Oh, yeah No, it's very important what I advocate and I never advocate a Vision of protectionism in fact if we go out and say oh we have to have this this component produced at home this component produced at home that's not going to work and The model I actually look at is ways you have to there's the ideal vision Which is that we're going to turn it all over to the marketplace and the basically the corporate Executives are going to distribute things and in a in a relatively efficient and safe way that runs into problems with the mercantilists What is missing in the system right now is the US state Standing up and saying we're not going to be as a nation a hundred percent dependent on China for vitamin C For instance, we're not going to be 90% China on dependent on China for the chemicals that go in our drugs So it's like so the the failure in Washington to say that to use power To force the distribution of these activities and when I say distribution doesn't mean that any of it comes home If in the case of vitamin C You've spread that out so that a quarter of their productions in Thailand a quarter of the productions and in Brazil a quarter of the Production is in Europe and a quarter remains in China. That's a pretty safe system. None of that is in the United States But you do need Sanctions you do need the the force of a nation-state standing up and saying we will not have To stand for this kind of concentration of power over us International political trust-buster. Yeah, so so this idea of a great moderation has obviously proven to be you know Rather illusory, but but how do you know as an organizational leader if you are experiencing? Resilient structures or if you're just experiencing a kind of you know false dawn of risklessness. I mean how how could you tell? It's hard to know right because I could tell you that the people who grew up in that environment didn't think they were in anything Unusual and it was 25 years long and and that was for many executives. It was their entire experience we've we've taken to at our firm to to articulating a notion of performance or a notion of corporate activity and measurement of the activity with this lens of what we call performance and health and Performance is how are you doing right now and health is how robust? Are you set up to do well in the future and and we and others have started to try to delineate? How do you measure current health? Which is really how do you predict a measurement of future performance under under a range of uncertainty? And it's got a whole bunch of dimensions around it that are that are strategic organizational product technology Right every aspect of the business system you can think about is having current performance and future health And I think just explicitly calling that out and not just focusing on the here and now and saying okay But what about health? How are we gonna do next year? Then you start looking at talent pipelines? How are we doing on campus with recruiting you just kind of go back in your system? You know what predicts the future and you pay attention on the precursors and I think with that we're about out of time. So thank you both for your presentations for interesting marks