by Alan M. Webber
photographs by Debra McClinton
from FC issue 45, page 130

Leave it to the dynamic, volatile, fast-paced new economy: Just when you think you know how to design your strategy, organize your team, and connect with your customers, something unanticipated, unexpected, and unsettling comes hurtling at you. It is, says Richard T. Pascale, a lot like life. "Let's be clear," says Pascale. "The idea of 'living systems' isn't a metaphor for how human institutions operate. It's the way they really are." In a recent book, Surfing the Edge of Chaos: The Laws of Nature and the New Laws of Business ( Crown Business, 2000 ), Pascale, with coauthors Mark Millemann and Linda Gioja, proposes a system of thinking and managing that Pascale believes represents the way that companies need to adapt in fast-changing times.

"Rapid rates of change, an explosion of new insights from the life sciences, and the insufficiency of the old-machine model to explain how business today really works have created a critical mass for a revolution in management thinking," Pascale says. Pascale's approach has been to start with serious business practices inside of serious organizations -- from the U.S. Army to Capital One Financial Corp., from Monsanto Co. to Royal Dutch/Shell Group -- finding techniques and tactics that reflect the principles of living systems. From those observations, Pascale has distilled both a set of laws and a compelling body of supporting evidence to suggest that the first rule of life is also the first rule of business: Adapt or die!

You're calling for new rules for business. What were the old rules?

If I had to generalize, I'd say that the old rules of the game rested on a management method that I call "social engineering," which operates according to three premises. First, intelligence is located at the top; Leadership is the head, organization is the body. Second, change is predictable. That is, when you design a change effort, there's a reasonable degree of predictability and control. Third, there is the assumption of cascading intention: Once a course of action is determined, initiative flows from the top down, and the only trick is to communicate it and roll it out through the ranks.

Those three assumptions are deeply baked into the minds of most executives. Those assumptions are so fundamental to how we think about business that it's hard even to be aware of how they govern the way that organizations are run.

So if those rules no longer apply, which rules do?

The first new law of life that leaders need to recognize is that equilibrium equals death. Companies that achieve homeostasis in their environment may enjoy a period of time when equilibrium really works. It may give them a dominant position, and it may result in outstanding economic rewards. But it makes them increasingly vulnerable to the moment when the game changes. Because when the game changes, their winning formula from the previous period becomes their own worst enemy.

Jim Kennedy, a former IBM executive, tells the story of how IBM experienced a steady erosion in the mainframe business. When Lou Gerstner took over as CEO, he wanted to understand how the company had managed to ignore this development for so long. Kennedy and his team were asked to take a look at strategic plans throughout the year. Kennedy says that they actually found several rooms full of strategic plans. But as the erosion in market share continued, the real strategic plans amounted to a couple of senior executives stepping into a room, closing the door, and deciding to raise prices. That's a classic example of an organization settling into equilibrium and then becoming a captive of its winning formula.

What does it take to break free from this law of equilibrium?

Companies have to ask themselves, Does the formula that has gotten me where I am still work? Or am I about to become a victim of my own success? Has the environment changed so that I'm wedded to a former winning strategy that won't win in the new world? Think of competitors in the world of the high jump. For decades, everyone went over the bar using the straddle technique. Then along comes Dick Fosbury, and he invents the technique of jumping over the bar backwards -- the famous Fosbury Flop. Which technique do you decide to use?

When the world around you changes, maintaining your equilibrium is a threat to your future existence. That's when you need a new kind of agility that enables you to reinvent yourself. Very simply, prolonged equilibrium dulls an organism's senses and saps its ability to arouse itself appropriately in the face of danger. Survival favors heightened adrenaline levels, wariness, and experimentation.

Which tools can companies use to escape from equilibrium?

One way for a company to respond in biological terms is by using the corporate equivalent of sexual reproduction. If the goal is to create change, it's clear from nature that sexual reproduction creates far more mutation and variety than parthenogenesis, or other forms of reproduction through which living organisms clone themselves. So the question for an organization that's trying to act like a living system is, Are we only generating clones as we bring in the next generation, or are we using cross-pollination to wake this place up? It goes back to disturbing the organism's equilibrium.

That is what mergers and acquisitions can do. For example, GE Capital Corp. makes 100 small acquisitions a year, deals that refresh its corporate gene pool. In fact, if you look at how GE tends to operate, it follows a consistent pattern: Amplify survival threats and foster disequilibrium to evoke fresh ideas and innovative responses. Other companies, such as Capital One, Cisco, and Enron Corp., have the same patterns. These groups regard acquisitions as a way of acquiring the DNA of the software and hardware engineers or of the financial engineers. That's at least as important as acquiring the customers or the underlying technology platform.

And then there's the question of how you can use that new DNA after you acquire it. For example, GE Capital holds "dream sessions" in each of their 28 businesses. Once each year, they bring in a group of their people who are under 30, who have young ideas, and who are on the edge of the organization in some fashion. You can only come if you meet those criteria. Then they ask them, "Where are the next new ideas?" The whole point is to tap into the new DNA in a fresh, powerful way.

Other companies are less welcoming to new DNA. They represent the enemies of sex. The top managers may try to bring in outsiders, but the board will limit those new voices, rather than amplify them. The social system of every company creates norms -- the insiders usually have a strong defensive reaction to new people with new ideas. So the social context of most companies usually operates to prevent new DNA from entering the organization. In that sense, they are enemies of sex.

The second biological law you cite is that companies need to steer near to the edge of chaos. How does that law apply?

If you tell most executives that they need to move their company to the edge of chaos, they will immediately think of a place -- a precarious spot. The image is one of taking your canoe to the edge of a waterfall. In fact, the edge of chaos is a condition, not a location: For an executive, that means operating your company in such a way that it experiences the maximum and most productive levels of mutation.

Take Capital One. It's another example of a company that has come from nowhere and has risen to become one of the largest credit-card issuers in the United States in a very short period of time. The leaders in that company have encouraged the organization to be innovative by embracing relentless discomfort -- and to do it without driving themselves so hard that everyone self-destructs.

So what does the edge of chaos look like for them? First, all of the associates in the company are given charters to innovate. These associates see themselves as champions of ideas. They are encouraged -- not just allowed, but encouraged -- to ignore anything that might distract them from the next big idea. Being obsessed with creativity is a good thing.

Second, to keep the organization from going completely off the edge, the leaders say that if an error occurs, it's everybody's fault, not somebody's fault. What that means is that while every associate is encouraged to come up with the next big idea, if something misfires, then the company doesn't engage in a lot of finger-pointing and blaming. People within the organization see themselves as entrepreneurs who are responsible for identifying and satisfying customer requests. Their aim is to come up with 10 or 12 new experiments or probes each day, using pricing models, demographic profiles, and other tools to come up with new angles and ideas. One example: They started with credit cards, and now they've moved into cell-phone packages, offering different pricing schemes for different types of cell-phone users.

Third, the leaders in the organization keep a careful watch on how teams are performing, and if a team looks like it has moved too far back from the edge of chaos, then senior management will move the team around. They'll pull some people out of one team and introduce some new people, all for the sake of keeping the creative-energy level high. The company's leaders take very seriously the idea of increasing variety, both internally and externally: They mix things up internally on their own teams, and they network externally with venture-capital firms to look for ideas that they can bring inside.

What does this say about a company whose leaders push it to the edge of chaos?

What this means is that the edge of chaos is a condition of relentless discomfort. That's first. But it is always uncomfortable when an environment has aspirations or structure that is so strong that your discomfort makes you constantly hone your competitive edge. Sure, we all know of organizations where people are relentlessly uncomfortable because those companies are simply miserable places to work -- where the energy that's produced by being uncomfortable simply goes toward unproductive or unsatisfying things.

Go back to how Capital One manages the tension. They hire hard-charging individuals and tell them to be entrepreneurial. You have to come up with new ideas every day of the week and ignore everybody who gets in your way. You're supposed to grow 20% a year. Those are all things that amplify the extreme entrepreneurialism in the company -- but how do you keep it from self-destructing? Along with growth rates and customer-retention rates, people at Capital One evaluate their own employees on what they call "behavioral anchors": Do you get things done through other people? Do you play well as a team member? Overall, the company's productivity arises from the fact that the structure of its corporate design allows all of the entrepreneurial stuff to have coherence. The important thing to remember is that innovations rarely emerge from systems with high degrees of order and stability. On the other hand, completely chaotic systems are simply too hot to handle. That's why it's important to find the edge of chaos, where a company can experience upheaval but not dissolution. The edge of chaos is not the abyss. It's the sweet spot for productive change.

Your third law involves self-organization and emergence. Where can we see that law at work?

Maybe the best way to understand self-organization is to describe what happens when it's not allowed to work -- when the old command-and-control business model is practiced. Remember January 1999, when a blizzard closed Detroit Metropolitan Airport and canceled outbound flights? Snowplows kept the runways open, and a number of inbound planes were able to land throughout the evening. Most carriers were able to bring their planes to the gates to off-load their passengers. But not Northwest Airlines.

Northwest's ground staff seemed paralyzed by indecision, held hostage by rigid policies and practices. Nearly 4,000 passengers were virtually imprisoned on 30 Northwest flights for as long as eight hours without food, water, or working toilets. Fights broke out. Passengers threatened to blow open emergency-exit doors. Northwest pilots screamed at ground staff over the radio to tow the planes to the gates before they lost total control of the situation.

The fact is that Northwest's inflexibility in adhering to rules and procedures for passenger safety caused them to overlook many possible solutions to the problem. They could have towed the planes close to the gates and let the passengers off on the tarmac. They could have let them off on the runways and bused them to the terminal. They could have brought service vehicles out to the planes with food, water, videos, baby formula, and diapers. What was missing that night in Detroit was self-organization. It would have been entirely different if the company's leaders had told the ground staff, "We have a huge disruption on our hands. Be innovative and imaginative, and demonstrate to each other and to our customers that we can come through when it counts." Instead, Northwest lacked the capacity of a living system to self-organize.

If that's a negative example, where in business can you see a positive case of self-organizing systems and emergence at work?

The opposite of the Northwest example would be the way that Linux has spread. It's an organization of open-system software programmers, now numbering 35,000 worldwide, who have managed to generate software for servers that now claim 35% of that market. This is a truly remarkable army of people, all independent, who come up with effective and robust solutions in their software because it's constantly being tested and is evolving in real time. It's a far more effective way to develop, test, and release software than its competitors' traditional commercial releases.

At the other end of the technology spectrum, Tupperware Worldwide is a powerful, successful self-organizing system. Each dealer is self-employed and must recruit others to host home parties. Those who excel as hosts become dealers, and the most-successful dealers become team leaders of protege dealers. Today, more than 80% of all homes in the United States have at least one Tupperware product in them. Tupperware sales exceed $2 billion a year.

Your last law says that to act in a biological way, leaders should disturb, but not direct, their organizations. How does that law work?

Disturb, don't direct means that we must rethink our old notions of social engineering inside of companies. Old-fashioned leaders work under the preconception that their job is to make the hierarchy perform. They think that if they can figure out the best course of action, communicate it down to the troops, and then measure the results, then they'll have a high-performance organization. The result is that you end up with a lot of leaders who have a tendency to overreach their authority and oversuppress their people. They end up optimizing their performance within smaller and smaller parameters -- which means that when the world changes, they have less and less diversity and creativity with which to respond. These leaders think that they're producing tough organizations. But they're really producing organizations that are less adaptable to change -- and that may cause a cataclysmic failure. Leaders have to remember that in living systems, things happen that you can't predict, and once they do, those events can set off avalanches with consequences that you could never imagine.

So if leaders accept the notion that business doesn't unfold in a predictable, linear fashion, then which principles should they use?

There are three guidelines that work together for businesspeople to consider: Design, don't engineer. Discover, don't dictate. And decipher, don't presuppose. Here's a simple example of how these rules work. Take any airport. In the lounge areas at each gate, you won't see any signs that say, "Don't talk too loudly," "Don't move the chairs," "Don't occupy more than one seat." But through the invisible hand of design, those things happen: The seats are arranged so that people talk to those who are close, and they don't shout across the room. The armrests are fixed, so you don't see people sprawling across a couple of chairs. The seats are heavy and bolted together, so you can't pick them up and rearrange them. It looks like it just happens -- but the architect has evolved design principles that disturb, but don't direct, the living system. Now, if you go to airports in Russia, you'll see the opposite: waiting areas where the chairs are movable, where there are signs directing people about how to behave, and where the police come and scold people for their bad behavior. What happens: People move the chairs, lie down on them, kids make houses out of them, and it's a shambles. They were relying on social engineering to create and enforce the rules. Instead of designing, they dictated. That leads to the second rule: Discover, don't dictate. As events unfold, you have to figure out the second- and third-order effects -- things that you could never have predicted, but that need to be considered. You begin to realize that you can't dictate an outcome. And just as important, once outcomes start to emerge, you can't dictate the fastest solution everywhere. Decipher, don't presuppose tells you that there is wisdom in each community, whether it's a team, a division, a department, or a factory. The trick is to create a design that allows a community to learn from itself, to come up with its own solutions to its problems. And then to have the restraint not to try to impose those solutions on every other community in the name of efficiency.

Alan M. Webber is a Fast Company founding editor. Visit Richard Pascale on the Web ( http://www.surfingchaos.com ).

Sidebar: The Four Principles of Life -- and Business

1. Equilibrium is a precursor to death. When a living system is in a state of equilibrium, it is less responsive to the changes that are occurring around it. It is most at risk when it feels most secure.
2. When threatened or when galvanized by a compelling opportunity, living things move toward the edge of chaos. This condition evokes higher levels of mutation and experimentation and is more likely to result in fresh new solutions.
3. As living things move closer to the edge of chaos, they have a tendency to self-organize, and new forms emerge from the turmoil. This property of life, called "self-organization and emergence," is a major source of innovation, creativity, and evolution.
4. Living systems cannot be directed along a linear path. Unforeseen consequences are inevitable. The challenge is to learn how to disturb them in a manner that approximates the desired outcome and then to correct the course as the outcome unfolds.

Sidebar: Navigating the Edge of Chaos

Here are tools that function as the compass, propulsion system, and charts for business leaders who want to move toward the edge of chaos without falling into the abyss.

Attractors. These are analogous to a compass. They orient living systems to one particular direction and provide them with the impetus to move outside of their comfort zones. There are three types of attractors: point attractors, cycle attractors, and strange attractors.

Amplifying and damping feedback. These are techniques within an organization that can serve as the throttle of a propulsion system, either increasing the speed of the change process or slowing it down.

Fitness landscape. This is the map that helps leaders visualize the terrain that their company must navigate. It offers a more useful visualization device than the traditional two-dimensional diagrams of inputs and outputs. There are three types of fitness landscapes: gradual, rugged, and random. Each of these can be used to describe a familiar type of business competition.