Manufacturers: dealing with the unknown

As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don't know
We don't know.

Donald Rumsfeld

The poem, penned by the former defence secretary for George Bush, sums up the problem with imponderables. More than half of what happens in the business world often seems to be outside the control of management. If anything, the greater connections in the global economy make things worse.

The subprime mortgage crisis that bubbled up in the United States from August 2007 is a case in point. It destroyed markets and shareholder wealth in ways that few had anticipated. Organisations as apparently unconnected as French and Chinese banks, Australian hospitals, US schools and other education institutes, local governments and bond insurers around the world were caught off-guard and places like Iceland and Dubai were brought to their knees by events that no one expected.

Imponderables emerge from contradictions, confusions, ambiguities and paradoxes. What do managers know in relation to imponderables? They know that the unexpected will happen but they do not know what it will be. The disciplines that they adopt need to be based on this reality.

Imponderables present a challenge for advanced manufacturers: how do you manage perpetual growth and innovation? How do you maintain growth no matter how the market changes?

Traditionally, management was all about re-engineering, continuous improvement. offshoring, outsourcing and cost cutting to make the business faster, and more efficient. Now the focus has shifted to management innovation, of staying ahead of the trends and catching the next wave. But that means manufacturers need to reshape their management practices.

But that is the real challenge. As the oft-quoted management guru Gary Hamel writes in his book The Future of Management (Harvard Business School Press, 2007), expecting most organisations to be strategically nimble, restlessly innovative and highly engaging places is like expecting a dog to tango. It simply isn’t in their DNA. He says organisations need to escape the “efficiency-centric, bureaucracy based managerial paradigm … most of us are still thinking like dogs.”

A number of forces are now creating imponderables.

Industry and product convergence

These are two related forms of convergence changing the industrial landscape. Traditionally, industries were defined by sectors and product lines but now, barriers are blending. For example, Apple, a computer company, has moved into telephony and music with the iPhone, iPod and iTunes; the search engine Google has entered the telecommunications market with Google Voice and the Google Android platform. This means that new competitive threats are emerging out of nowhere.

China and India

While the rest of the world has been gripped by economic, financial disaster and zero growth, India has been growing at 5 per cent and China at about 7 per cent. Analysts say China is becoming a centrifugal force by pulling investment in and positioning itself as the world’s workshop. India on the other hand is a centripetal force, pushing itself into knowledge intensive industries such as IT and contact centres and turning itself into the world’s back office. All this will transform industries, such as the automotive sector, investment patterns and the shape of the global economy.

End of low inflation

Prices are going up and we seem to be headed for a period of hyper-inflation, reminiscent of the 1920s in Germany when you could paper the walls with money. German finance minister Peer Steinbrueck has warned governments around the world that they will need to have policies to stop hyper inflation when the financial crisis has passed. Because the US and British governments will struggle to manage their massive public debt, there will be a flight from those currencies and that could generate worldwide inflation.

Plummeting communications and technology costs

The barriers to entry are falling. Lower costs, combined with deregulation, will open the way for new low cost companies and business models from Amazon to Google, from eBay to Skype. This will present challenges to incumbents, while opening new industries and opportunities.

Climate change

The climate crisis will have an impact on business in several ways. These include higher costs for energy, water, raw materials and waste, insurance, and monitoring, rules requiring businesses to use less resources, consumer preferences for environmentally friendly products and services that reduce the impact of product consumption, pressure from institutions and shareholders and the imposition of mandatory supply chain sustainability criteria. Perhaps the most significant impact will come from increased government regulation and laws, including the introduction of an emission trading scheme.

Digitisation

The digitisation of just about everything that can’t be nailed down will threaten businesses that make money out of their intellectual property. The music, newspapers, cinema, pharmaceuticals and fashion industries will need to adapt in order to survive where ideas will “demand to be free”. Manufacturers will need to place more focus on protecting IP.

Energy

The rise of China and India has resulted in increased demand for energy. In particular, China, which just over a decade ago was a net exporter of oil, now imports 5.4 million barrels a day. It surpassed Japan as the world's biggest importer of oil in 2005, and is projected to need Saudi Arabia's entire annual production by 2012. The world is projected to move from consuming 5.5 billion barrels a day to 7.5 billion barrels a day by 2020. The Organisation for Economic Co-operation and Development is projecting that energy consumption will quadruple by 2050. At the same time, however, output from the world's oil fields is declining at a faster rate than expected and will require massive investment. Oil prices will continue to climb. All this will put enormous pressure on manufacturers.

Understanding the limits of knowledge is vital to understanding something effectively. Writing in the Harvard Business Review in 2003, David Gray argued that ignorance management was a more important skill than knowledge management and called for the introduction of a “chief ignorance officer”. It means embracing “nescience”, a word which simply means a lack of knowledge or awareness. Managers, he said, he can do this by four methods: sheltering nescience as long as possible and not filling the vacuum with ready knowledge, abandoning the idea that you need to have complete knowledge before you can act, having the freedom to explore what seems irrelevant but which in the end could prove to be fruitful, and to accumulate lots of ideas, even if most of them will not work.

Paying attention to nescience can remind us that if we want knowledge that is worth managing, we have to create it first. In other words, true wisdom and insight come from acknowledging and embracing one’s limitations. As the noted British historian Lord Acton said, mastery is acquired through resolved limitation. Donald Rumsfeld was a bit more blunt in his assessment, but was saying the same thing.

Watching these trends, and accepting that one can work around them, is one of creating the future. As the leading management thinker Peter Drucker once said, the best way to predict the future is to create it.