Innovating in a world of complex networks

B etting against the U.S. economy has never been a smart idea. Time and again, our economy has shown remarkable resilience to overcome major disruptions, collapses and failures. From the several panics of the 19th century through the Depression of the 20th, the national economy has regained its footing and moved to a new level of prosperity.

It makes sense to remember this history, as we face a sluggish recovery, enormous government debt burdens, uncontrolled health care costs, and mediocre primary and secondary educational systems mired in the middle among advanced countries. Now we face another major transition, one that will take us a decade or more to get through. To understand the nature of this transition, we need start with where we have been.

The starting point: Understanding our grandfather’s economy

At the midway point between the coal fields of West Virginia and the iron ore fields of the Mesabi range in Minnesota, Cleveland quickly emerged as a steel town in the 1880’s. On July 3, 1897, photographer James White of Thomas Edison’s Edison Manufacturing Company shot scenes for what is probably the first industrial film produced in the United States. In a little over 30 seconds, White showed a full rail car of coal being turned upside down and dumped at the vast Erie Railroad docks in Cleveland.

The next year, 1898, George Hulett patented his invention for unloading taconite from ore boats coming from the Iron Range. Hulett’s invention replaced hand shovels that could unload only about 100 tons a day. The first generation of his unloaders could handle 6,000 tons a day. Later versions unloaded ships at 1,000 tons an hour. These giant Hulett iron ore unloaders operated on the shores of Lake Erie near Cleveland until 1992.

In  some ways, our grandfathers had it easy. They built our Industrial Revolution––and America’s great surge of prosperity in the 20th century–– on a foundation of analysis and logic. They worked with a widely shared belief that they could break apart complicated problems into a rational set of linear, cause and effect relationships. In this way, they designed remarkable mechanical systems, like the Huletts.

Henry Ford’s River Rouge facility stood at the apex of the industrial pyramid. Ford built this complex outside Detroit as a cathedral to manufacturing.  Completed in 1928, the Rouge operated as the largest integrated manufacturing facility in the world. Coming in at one end of the complex: iron ore and coal. Coming out at the other end: automobiles.

With the power of logic and analysis, these industrial entrepreneurs created mass markets in everything from radios and appliances to soap and automobiles.   They also designed innovative hierarchical organizations to manage sophisticated businesses and launch national brands: Proctor & Gamble, Heinz, Pillsbury, Campbell Soup, Eastman Kodak. In the process, they set in motion mass production capable of generating enormous wealth.

Moving to a new era

Signals began appearing forty years ago that the foundation underneath our grandfather’s economy was crumbling. The first Arab oil embargo in 1973 marked an end to our energy independence. In the same year, the Tokyo Round of trade negotiations began a dramatic reduction in trade barriers. Soon thereafter, U.S. multinationals started moving their production abroad and creating globally integrated manufacturing networks. The emergence of the personal computer in the 1980’s gave rise to yet another transformation that few people saw coming: the explosion of the Internet beginning in the mid-1990s.

Now, at least forty years after this transition began, we can more easily see its contours. We are entering a new economic era. Open markets and the Internet have integrated the isolated national markets of our grandfather’s era. We now live in a world in which vast pools of low cost, unskilled labor are available anywhere; technology quickly hops borders; and capital flies around the world in the flicker of a computer screen. No one is quite sure where all this is heading, but we can be certain that technology and globalization will not be kind to those among us with low skills and little ambition to learn.

Perhaps the biggest unknown we face comes from the impact of our economic activity on our environment. Canadian analyst Thomas Homer Dixon points out that since 1900 the population of the world multiplied by four times. Over the same period the consumption of each individual also increased about four times. In a little over 100 years, the human impact on the planet’s resources has gone up about 16 times.

We are slowly understanding these shifts and moving to a different vantage point, a place where we can see connections and networks. In this world, no simple logic applies. If we go back to the mid-1990s, we can see how these complexities began to emerge across the country.

  • In Ascension Parish, Louisiana, where residential development collided with a fragile landscape;
  • In Lewis County, Kentucky, where global competition quickly drained prosperity from the local economy;
  • In Charleston, South Carolina where a local government faced the challenge of competing in a knowledge economy; and
  • In Oklahoma City where determined civic leaders worked to define a new sense of direction, self-confidence and hope.

In each place, I have seen civic leaders confronting complexities that call for ingenuity, agility, and a new approaches to leadership and collaboration.

Ascension Parish, Louisiana: Confronting the physical limits of growth on the bayou

Only a few feet above sea level, Ascension Parish, Louisiana does not appear to be very complex place. Located just south of Baton Rouge, the parish (or “county” as it is called in the rest of the country) stretches across the vast wetlands that make up South Louisiana. The Mississippi River bisects the parish and has long served as the home for major petrochemical plants. Interstate 10 parallels the river and provides the main escape route for residents of New Orleans during hurricane season.

In the mid 1990s, a growing influx of people from East Baton Rouge Parish posed problem for civic leaders in the parish. Residential developers pushed development sites into fragile open lands to meet the demand of people wanting to leave Baton Rouge. More subdivisions meant cutting down more trees, adding more traffic, increasing the stress on schools, police and volunteer fire departments. Fundamentally rural, Ascension Parish was ill-equipped to handle the pressure.

What is more, wetlands do not make for good development sites, so developers imported dirt to raise the ground. Imported dirt did not help the neighbors, though. It simply pushed water on to adjacent properties. With no zoning or subdivision regulations in place, developers built with a free hand and little oversight. Meanwhile, many new residents to the parish found themselves saddled with crumbling roads, inadequate services, and even public health hazards like raw sewage in their backyard.

School officials saw growth from another vantage point. They feverishly scouted new sites for more schools. It turned out to be no simple task. Keeping up with the demand was like throwing darts in the dark. No one had a clear sense for the unprecedented growth in the school population. Would it continue to accelerate or tail off?

While residents became more frustrated, safety managers at the chemical plants grew more alarmed. They worried privately about the growing residential encroachment of subdivisions near their plants.  In the event of a large, dangerous chemical release, how could they evacuate people in time?

Lewis County, Kentucky: Finding globalization (and other challenges) on your doorstep

Half a continent to the north, citizens in Lewis County, KY found themselves confronting a different set of challenges. The county’s largest employer, a shoe factory, had just closed down. That was not the worst of it.  In a community meeting, the factory’s manager announced that none of the 200 or so workers in the shoe factory had the literacy skills to pass the screening tests for new employers coming into the regional industrial park.

Stunning as that news seemed to be, the County Sheriff had other matters on his mind. He expressed his frustration that nobody appeared willing to confront the epidemic of methamphetamines sweeping the county. Trying to sweep the matter under the rug, he assured the group, would not make the problem go away. He pointed out that locally produced methamphetamines were starting to appear across Kentucky, and that in one county, police had found a mobil meth lab in the back of a van.

While people grappled to absorb the meaning of that news, a representative from the high school stood up. She declared that only about half of the students coming out of the public school were proficient in reading. Like the Sheriff, she wondered why no one discussed this issue. Another silence fell over the group. Everyone seemed paralyzed by the tension between the County’s two top elected officials who sat at opposite ends of the room. They rarely spoke to one another.

Charleston, South Carolina: Moving to a knowledge economy (whatever that means)

Around the same time, Ernest Andrade,  an official with city government in Charleston, South Carolina began focusing on another question. How could the Charleston develop a new economic strength among knowledge-based businesses? Long known as a tourist destination, Charleston got into the game of recruiting companies only after the Navy closed its base in 1996.

A regional economic development alliance launched and immediately started scoring successes by attracting larger manufacturing plants to the outlying counties of Berkeley and Dorchester. Ernest focused his attention on a different target. He wanted to know how to build a vibrant economy around smaller high-growth businesses that would be attracted to the urban amenities that downtown Charleston offered.

There was only one problem. Not many of these firms existed in Charleston in the mid-1990s. He had no budget to attract them, and he seemed to face an overwhelming obstacle: the lack of a deep talent pool of technically skilled people. Charleston had no research university on which to draw. Companies were reluctant to move to Charleston without a talent pool. Young professionals were also reluctant to relocate without a deeper base of high-growth companies. They worried that without other employers they had no realistic alternatives in Charleston, if things did not work out with their company. Ernest sensed the difficulties ahead. Where to begin?

Oklahoma City, Oklahoma: Confronting domestic terrorism

As morning broke on April 19, 1995, nobody expected a bombing in Oklahoma City. Along with the rest of the country, the destruction of the federal building stunned civic leaders in Oklahoma City. For the past year, they had been working on a plan to reshape their city’s economy. In the past, Oklahoma CIty had ridden high on oil. Yet, with the collapse of oil markets in the 1980’s, city leaders seemed lost, unable to find a new self-image.

By the early 1990’s, that was beginning to change. A new mayor and a new generation of business leadership had begun to replace a sense of despair and decline with a new self-confidence and hope for the future. Then, in the course of a few minutes, it all seemed to disappear.

Welcome to the world of complex networks

Cities and regions across the country face change of an unprecedented pace and scale. Some confront the challenges of sprawl, others work to diversify their economy, and still others face rapid dislocations that are impossible to predict.  These challenges, whether born in growth or decline, share some common characteristics.

Our challenges appear in the “civic space” where no one is in charge. No one organization can address all of the challenges facing our communities and regions. These challenges fall beyond the boundaries of any one organization. They require us to think and act collectively outside the four walls of any one organization. We need to collaborate in this “civic space”.

In Charleston, a dozen or so different entities play some role in economic and workforce development. How can these different entities align? How do they avoid conflicts and fragmentation? Mayor Riley, one of the longest serving mayors in the country, has no magic wand, no pixie dust that can make everyone get along. What happens when traditional elected leadership falls down? When business leadership collapses, as companies move away? What happens in places like Lewis County when political leaders barely communicate with each other?

There are no single, simplistic solutions, because the future is unknowable.  Part of the problem, of course, is that there is no single solution to these challenges, because no one really knows where we are heading. Our future is both murky and unknowable. Civic leaders across the country have spent countless hours developing “visions” for their community. Yet, this simple-sounding exercise is not so easy. Any future is more like a hologram. Complex realities include multiple dimensions, each interpreted differently by people from their own perspective.

Here’s an example of the difficulty of visualizing a future to guide us. In the mid-1990’s many Ascension Parish residents wanted  to maintain the “rural character” of the parish in the face of the population influx. But what did that mean?  To some it meant preserving hundred-year-old oak trees. To others, it meant controlling the visual litter of commercial signs. Others wanted no more residential or commercial development.  Others wanted to preserve a rural character for their homestead — a big lot — along with suburban amenities: regular trash pick-up and fast, reliable emergency services. Still others interpreted “rural” to mean no government interference. They wanted the right to move a mobile home onto their property for their children, regardless of what the neighbors thought. How do you design a future with such different perspectives on such a simple idea of maintaining the rural character of the place?

Every solution has a side effect. Whether we like it or not, whatever we do has multiple effects. This idea, also known as the “law of unintended consequences”, means that we can never map out all of the impacts of what we do before we do them.

There’s nothing new here. Political commentator E.J. Dionne has explained how neoconservatism rose to prominence by repeatedly pointing out the law of unintended consequences. In the wake of Lyndon Johnson’s Great Society, they cataloged a growing list of failed liberal programs. Public housing projects trapped single mothers and broken families in a cycle of violent crime. Workforce training programs created new social services that absorbed huge flows of money and produced only mediocre results. School busing drove whites from urban school districts and made segregation worse.

Unintended consequences arise because we are dealing with complex interactions, not linear, cause-and-effect linkages. Here is a thought experiment to illustrate the point. Assume that we are on the school board, and we want to provide bonuses teachers for improving the social behavior of students. First, we have to figure out how we will measure “improved social behavior”. Reduced reports of disruptive behavior makes sense, so we will choose that.

We then decide that any teacher who reduces reports of disruptive behavior by 25% will receive a bonus. Our new initiative starts out fine, and we see reports of disruptive behavior falling. Meanwhile, we start hearing about more fights breaking out. What’s going on? We investigate and learn that teachers are “gaming” the system. Rather than teaching students the basics of improved social behavior — how to resolve conflicts without violence — the teachers have simply decided to become more lax and not file reports of disruptive behavior. So, in the end, our solution created a more serious problem.

Our challenges do not stand still.  With conditions around us continuously shifting, any solution is temporary. Our challenges continuously evolve.  The tricky question is whether we can learn the lessons of the frog and the lilly pads.  We start with the lesson of the frog. Many of the changes we face are imperceptible, but cumulatively they can be devastating. With imperceptible changes, we may face the plight of the frog immersed in water that is slowly heated. The frog remains oblivious to the change until it is too late, and the he gets cooked.

Dynamic changes create other challenges. It turns out that with complex systems, these changes change can accelerate, giving us less time to react. We can illustrate this point with the example of lilly pads growing in a pond. Let’s say you own a pond, and one day you notice a small water lilly growing in the corner. You come back the next day, and now there are two. Over the next week, you notice that the lilly pads continuing to grow, doubling about every day. After 30 days, you find that the lilly pads are now covering half the pond. You say to yourself, “I really need to do something about this problem, because the lilly pads will crowd out all the other vegetation int he pond.” How much time do you have to act? The answer: one day.

Dynamic change has other characteristics. Occasionally, our challenges shift in an big, abrupt and unexpected way.  How does a community respond to a terrorist attack like Oklahoma City? Or, a hurricane like Katrina? Or, tornadoes like those that swept through the South in April 2011? Or a collapse of a major employer? How do we organize ourselves so that we can respond to these challenges?  What does it mean to become more resilient to these shocks? How do we do that?

With these deep transformations taking place in our economy, we will need to do our strategic thinking differently. The disciplines of strategy that worked well for our grandfather’s economy do not work so well today. We need new approaches to develop, guide and focus open networks, so that we can take on these complex challenges.

Like our grandfathers, we will innovate. But we will innovate in a different way. We will innovate though open networks, not close, tightly bound organizations. We will learn to be agile and adaptive, not stable and controlling. We will need many different types of leaders, not just one visionary. We will stress collaboration built on trust, because trusted relationships build speed. They help us learn faster, align resources faster. Make decision faster. Before we examine how we will innovate in open networks, we need to explore in more depth exacting what we mean by innovation, and why it is so important.

Ed Morrison is Director of the Purdue Agile Strategy Lab. He is also an adjunct professor at the University of the Sunshine Coast in Queensland, Australia. For the past five or six years, he has been developing new, agile approaches to strategy in open, loosely joined networks, a discipline he calls Strategic Doing. Prior to starting his economic development work, Ed worked for Telesis, a corporate strategy consulting firm. In this position, he served on consulting teams for clients such as Ford Motor Company, Volvo, and General Electric. He conducted manufacturing cost studies in the U.S., Japan, Mexico, Canada, Italy, Sweden, and France. Ed started his professional career in Washington, D.C., where he has served as a legislative assistant to an Ohio Congressman, staff attorney in the Federal Trade Commission, and staff counsel in the US Senate. He holds a BA degree cum laude with honors from Yale University and MBA and JD degrees from the University of Virginia.

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