Achieving Business Equilibrium

The Three Laws of Crisis: What Thermodynamics Teaches Us

“Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world…”

WB Yeats

 

Once upon a time, I studied chemical engineering. Those classes usually feel like another lifetime, but more recently, as people talk about the confusion and uncertainty of the COVID crisis, I’ve been thinking about entropy and the Laws of Thermodynamics. Like everything else in the universe, a crisis obeys nature’s laws. To figure out where it’s going and what’s next, it helps to observe events like a scientist, with a dispassionate eye.

The First Law of Thermodynamics is the one most of us are familiar with. The total energy of a system is constant, and that energy is neither created nor destroyed.

I like to think of the First Law concerning normal societal, organizational, or market dynamics. We often feel, under normal circumstances, that change is non-stop. We say that “so much is going on.” But the dynamics of change are really just about energy and attention moving to different places in the system and taking different forms.

You are in the marketing department responsible for a particular product line. Then a new product is introduced. Suddenly, your focus goes there. It may feel like you are busier, and the energy of the system is increasing, but it’s mostly just a shift in energy, bringing your attention from a variety of concerns toward one pressing concern.

The Second Law of Thermodynamics describes what happens when systems collide. For example, when hot water meets cold water, the energy of that heat will spread, changing both systems. This dramatic, system-wide change is analogous to what happens during a crisis. Suddenly, equilibrium is disrupted, and chaos abounds. That chaos is natural though, and part of the process of transformation.

The Third Law of Thermodynamics holds that the entropy of a system will return to zero as the “temperature approaches absolute zero.” The analogy is clear. Eventually, the chaos and turmoil of the energy exchange subsidies.

Every crisis — including the current COVID-crisis — is a high entropy situation. Today we are seeing rampant unemployment, the reconfiguration of social norms, the evolution of industries, the destruction of various companies, and changes in lifestyle, attitude, and mental health. Even changes that were bound to happen — like the wholesale shift to digital technologies — are speeding up.

As we know through thermodynamic systems, additional energy decreases eventually entropy (and chaos). So it goes in business and life. The crisis that now taxes us heavily will slow and achieve a new normal.

If that future is inevitable, how can companies best prepare and position themselves for the next phase? I recommend thinking like a scientist observing a system in flux to update or upgrade the way your business functions:

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  1. Work

Find the right balance between remote & onsite work according to function and job. Maybe an employee survey will help. Construct a new work architecture while keeping in mind the downsides of each option and the effects on productivityconnectivity, and affinity. Train groups of employees to adapt. Review labor costs and the corresponding infrastructure. The “At Home” use case, as I call it, will bring tectonic changes in several industries, including Real EstateEquipmentTransportation, Retail, Entertainment, and Education, to name just a few.

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2. Supply chain

Identify vulnerabilities in your supply chain. Are you too reliant on overseas sources? Review business continuity in the light of future disruptions. Reexamine nearshoring options and couple the “Just-in-Time” concept with a “Just-in-Case” scenario. An out-of-stock situation can be more expensive compared to a slight increase in your variable costs. Think about how you can maintain operations advantageously in the future.

3. Customers

There is no guarantee that your lapsed customers will return, so figure out how to meet them in their new reality. I recently heard some news about a lottery operations business. This was a phenomenally successful business before COVID, enabling the elderly to gamble offline by paying a visit to the corner store. With COVID and lockdowns, the elderly became more reliant on their smartphones and tablets to communicate with their families. In the process, they also figured out how to gamble online. Now, those customers are likely gone, unless the offline business transforms dramatically and quickly.

4. Financials

Your financial operations will likely need to change, too. New measurements and new control mechanisms might be necessary to optimize costs and improve margins. Redo your math and prepare a push-button plan for the next crisis. To increase cash for the needy periods, different payment terms might apply, or even entire revenue models might be revised favoring subscription models where possible.

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5. Organization Readiness

This requires what I call Crisis Leadership. Get prepared for wave II, or other extreme threats that might be detrimental for your business. Put energy — remember you need it to reverse the entropy increase — to evaluate your people, your teams, your strategies. Pick the right players for different scenarios and train them accordingly. Develop scenario planning muscles so that they become a tacit capability, a natural response to any unwanted situation. Teach people not only to cope but also to learn from the crisis.

Remember, the disorder is not an accident. It is a natural stage of life. As Stephen Hawking said, “it is what distinguishes the past from the future, giving a direction to time”. See it as a gift and get the most out of it.

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