Chaotics

The Business of Managing and Marketing in the Age of Turbulence

Philip Kotler, John A. Caslione

• Publisher: AMACOM
• Year: 2009
• eBook ISBN: 9780814415245
• Topic: Economics
• Subtopic: Management
• Index: Economics

As the fallout from the financial meltdown of 2008 grows progressively worse, companies, industries, and entire markets cling precariously to life or have ceased to exist altogether. And the turbulence may not be over any time soon.

In Chaotics, noted business strategists Philip Kotler and John Caslione present the intriguing, if unsettling, argument that these troubled times are not an aberration, but the new face of normal. In fact, the economic downturn is part of a continually oscillating Age of Turbulence, where both risk and opportunity are quickly felt around the world, now inexorably linked by globalism and technology. It’s a world that chews up the unprepared, but rewards the prepared—those robust companies that have the ability to quickly anticipate and effectively respond to potential threats.

Packed with illuminating examples of resilient companies that are successfully navigating turbulence, as well as many painful examples of bankrupt or soon-to-be defunct companies unprepared for the chaos that felled them, Chaotics provides deep insights and practical strategies for not only surviving the current economic down­turn, but also thriving amid the many slumps and spurts of prosperity that lie ahead.

At the heart of this book is an innovative Chaotics Management System for minimizing vulnerability and exploiting opportunities—and putting your­self way ahead of your competitors, most of whom are clinging to the same old panic tactics of across-the-board staff cuts, deep price discounts, and slashed investments in marketing, branding, and new product development. The system out­lined here helps you completely rethink how you man­age and market during recession and other turbulent conditions, including how to:

• Develop early warning systems for identifying the first signs of upheaval, including disrup­tive innovations and shocks
• Construct detailed worst-case, best-case, and most-expected-case scenarios using the strategies for effectively dealing with each
• Cut costs or enhance efficiency strategically in specific departments: finance, information technology, manufacturing, purchasing, and human resources
• Secure your market share from core customer segments—without decimating customer research and marketing budgets
• Compress strategic planning into shorter, three-month time cycles to keep a closer read on the pulse of the company
• Prevent the potentially catastrophic consequences of abandoning core principles

Timely, practical, and compelling, Chaotics is an indispensable guide for business leaders striving to survive today’s economic storms and to prosper through the inevitable turbulence of tomorrow.

 

CHAPTER ONE

The World Has Entered
a New Economic Stage
From Normality to Turbulence

Prosperity is a great teacher; adversity a greater.

—William Hazlitt (1778–1830)

THE WORLD HAS entered a new economic stage. National economies are intimately linked and interdependent. Commerce is conducted with information flows moving at the speed of light over the Internet and mobile phones. This new stage confers wonderful benefits in bringing down costs and speeding up the production and delivery of goods and services. But it also comes with a dark side, one that substantially raises the level of risk and uncertainty facing producers and consumers. An event or change in the circumstances of one country—whether a bank failure, a stock market or real estate crash, a political assassination, or a currency default—can spread to many other countries and create massive turbulence, spinning the whole system toward completely unforeseen outcomes.

Deliveries don’t arrive in time, banks stop making loans and start demanding repayment, employers lay off workers, and economies begin a downward spiral. Companies make more cautious decisions. They put new product development on hold; they reduce their marketing and advertising budgets. Prudence dictates slimming down, surviving in the short run and disinvesting as far as the long run is concerned. The great economist John Maynard Keynes remarked that in the long run, we are all dead.

Conditions eventually hit rock bottom, after a multitude of bankruptcies, foreclosures, lost jobs, and lost income. Somehow basic needs and government action may put a floor on the losses and things start looking a little better. Turbulence and pessimism are replaced by a measure of stability and renewed confidence. Betting on a recovery, some companies seek increased opportunities and investments. It all sounds like the classic business cycle with its ups and downs, where overexpansion is followed by subsequent underinvestment before returning to normal.

But even when normalcy returns to the economy, it doesn’t return to every industry or market or individual company. Hypercompetition operates continuously and relentlessly in normal times. The U.S. auto industry today is experiencing a perfect storm of high health care costs and enormous pension obligations converging with falling demand for its products, which for decades have been seen as less attractive than foreign competitors’ products. The airline industry is marked by too much capacity and further consolidation is likely. Even without a global financial meltdown, times can be turbulent for specific industries and organizations.

Turbulence always means an increase in risk and uncertainty. Risk is used to describe uncertainty that can be estimated and for which insurance can be purchased. But there is always uninsurable risk, real uncertainty that company decision makers face. Instead of companies seeking to maximize their returns in the face of high uncertainty, they might instead make decisions that minimize risk so that if the worst happens, the companies will still survive.

The National Intelligence Council released a 2008 report entitled Global Trends 2025: A Transformed World. Its purpose was to stimulate strategic thinking about the future by identifying key trends, the factors that drive them, where they seem to be headed, and how they may interact. It used a number of scenarios to illustrate some of the many ways in which the drivers examined in the report (e.g., globalization, demography, the rise of new powers, the decay of international institutions, climate change, and the geopolitics of energy) may interact to generate challenges and opportunities for future decision makers and business leaders. Global Trends 2025 isn’t a prediction of what is to come in the next decade and beyond, but a description of the drivers and developments likely to shape world events.¹

Reading the report further reinforces the point that for the foreseeable future, the world will be facing ongoing disruptions, turbulence, chaos, and violence. These factors will impact business around the globe directly and indirectly, creating an environment that business leaders will have to deal with if their companies are to remain viable over the long term.

Such was the case in India over three terrifying days in late November 2008, when armed Islamist militants mounted a multipronged overnight attack in Mumbai, India’s sprawling business capital of more than 18 million people. The sheer scale and audacity of the assault were staggering. Gangs of well-armed youths attacked two luxury hotels, a restaurant, a railway station, a Jewish center, and at least one hospital. Gunfire and explosions rang through Mumbai with 179 people killed and more than 300 wounded, including several foreigners from America, Japan, and Britain, as well as Mumbai’s chief counterterrorism officer. Up to 100 hostages, including selected American and British guests, were held hostage inside a hotel.²

The attacks appeared to ratchet up tensions in an already volatile region. As one of the BRIC countries (Brazil, Russia, India, and China, a term coined in 2001 by Goldman Sachs head of global research, Jim O’Neill), India was on the fast track to pull itself out of decades of economic stagnation before the terrorists hit. India, no stranger to terrorist attacks in recent years, had recovered from most of them to stay on its economic fast track. But regrettably, as the globalized world is now characterized by an interlocking fragility that spreads the news of chaos virally and instantaneously throughout a global news network, India, and possibly that entire region of Asia, may backslide. After all, foreign businesses are reluctant to put their people and their investments in harm’s way.

As summarized in Figure 1–1 and Figure 1–2, there are a multitude of reasons for the rising uncertainty that will bring new and increasing challenges to business leaders in the next two decades.

In the next decade and beyond, according to Global Trends 2025, we can anticipate increasing turbulence around the world: rapid political leadership change in emerging markets; major policy shifts; increasing armed conflicts; local and national government budget cuts and the spillover effect on business. We are living in uncertain times. That means there is greater risk for businesses of all sizes everywhere in the world. They need new strategies to protect themselves and to capitalize on the opportunities that will undoubtedly arise.

While companies are gearing up for the greater turbulence and chaos that lie ahead, they will not soon forget the pain and the lessons of the 2008 financial meltdown. Companies will proceed more cautiously and adopt a risk-oriented mindset. Governments will try to pass regulations that will prevent a repeat of this kind of housing and mortgage bubble. Banks and companies will be less prone to sell their goods and services “with no money down.” Credit practices will be monitored more carefully to avoid another “house of cards” economy.

RELATIVE CERTAINTIES	LIKELY IMPACT
A global multipolar system is emerging with the rise of China, India, and others. The relative power of nonstate actors—businesses, tribes, religious organizations, and even criminal networks—also will increase.	By 2025, a single “international community” composed of nation-states will no longer exist. Power will be more dispersed, with the newer players bringing new rules to the game, while risks will increase that the traditional Western alliances will weaken. Rather than emulating Western models of political and economic development, more countries may be attracted to China’s alternative development model. As some countries become more invested in their economic well-being, incentives toward geopolitical stability could increase. However, the transfer is strengthening states like Russia that want to challenge the Western order. Shrinking economic and military capabilities may force the United States into a difficult set of tradeoffs between domestic versus foreign policy priorities.
The unprecedented shift in relative wealth and economic power, roughly from West to East now under way, will continue.
The United States will remain the single most powerful country but will be less dominant.
Continued economic growth—coupled with 1.2 billion more people by 2025—will put pressure on energy, food, and water resources.	The pace of technological innovation will be key to outcomes during this period. All current technologies are inadequate for replacing traditional energy architecture on the scale needed.
The number of countries with youthful populations in the “arc of instability” will decrease, but the populations of several youth-bulge states are projected to remain on rapid growth trajectories.	Unless unemployment conditions change dramatically in parlous youth-bulge states such as Afghanistan, Nigeria, Pakistan, and Yemen, these countries will remain ripe for continued instability and state failure.
The potential for conflict will increase, owing to rapid changes in parts of the greater Middle East and the spread of lethal capabilities. Terrorism is unlikely to disappear by 2025, but its appeal could lessen if economic growth continues in the Middle East and youth unemployment is reduced. For those terrorists that are active, the diffusion of technologies puts dangerous capabilities within their reach.	The need for the United States to act as regional balancer in the Middle East will increase, although other outside powers—Russia, China, and India—will play greater roles than today. Opportunities for mass-casualty terrorist attacks using chemical, biological, or less likely, nuclear weapons, will increase as technology diffuses and nuclear power (and possibly weapons) programs expand. The practical and psychological consequences of such attacks will intensify in an increasingly globalized world.

Figure 1–1. Global trends 2025: relative certainties and likely impact.

Global Trends 2025: A Transformed World, U.S. Office of the National Intelligence Council, November 2008

KEY UNCERTAINTIES	POTENTIAL CONSEQUENCES
Whether an energy transition away from oil and gas—supported by improved energy storage, biofuels, and clean coal—is completed during the 2025 time frame. How quickly climate change occurs and the locations where its impact is most pronounced. Whether mercantilism stages a comeback and global markets recede.	With high oil and gas prices, major exporters such as Russia and Iran will substantially augment their levels of national power, with Russia’s GDP potentially approaching that of the United Kingdom and France. A sustained plunge in prices, perhaps underpinned by a fundamental switch to new energy sources, could trigger a long-term decline for producers as global and regional players. Climate change is likely to exacerbate resource (particularly water) scarcities. Descending into a world of resource nationalism increases the risk of great power confrontations.
Whether advances toward democracy occur in China and Russia.	Political pluralism seems less likely in Russia, absent economic diversification. A growing middle class increases the chances of political liberalization and potentially greater nationalism in China.
Whether regional fears about a nuclear-armed Iran trigger an arms race and greater militarization. Whether the...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Preface
• Acknowledgments
• Introduction
• 1. The World Has Entered a New Economic Stage: From Normality to Turbulence
• 2. Management’s Wrong Responses to Turbulence Now Become Dangerous
• 3. The Chaotics Model: Managing Vulnerability and Opportunity
• 4. Designing Management Systems for Resilience
• 5. Designing Marketing Systems for Resilience
• 6. Thriving In the Age of Turbulence: Achieving Business Enterprise Sustainability
• Notes
• Index
• About the Authors