The Tolerant Company

There was a time, when the balance of payments of Chile deteriorated to the point that foreign exchange became a problem to the country. The causes seem clear: Chile could no longer produce its own food and had to rely increasingly on imports. The United States decided to offer a helping hand and dispatched a team of agronomists to study the problem.

The team flew to Santiago de Chile and proceeded from there directly to the Andes Mountains. The Andes are the region where the potato originated; it is still a main staple in the Chilean diet. Potatoes have grown for thousands of years at considerable heights in the mountains.

The U.S. agronomists climbed these heights and looked at the potato field. The fields clung precipitously to the mountainsides. They had irregular shapes and were interspersed with boulders. Within each field, the agronomists discovered ten or more varieties of potatoes growing. There were round potatoes and elongated potatoes, red, white, and blue potatoes; and many more perturbing to the scientists – some plants that bore many potatoes and others that bore only a few tubers. These seem terribly inefficient.

By then the team had most of the elements needed to write a convincing report. Out came the hand-held computers. The calculations showed, beyond doubt, that a more careful selection of seed of potatoes, a switch to higher-yield varieties, and a more systematic weeding and cropping of the fields would increase the annual crop by at least 15 percent. Because this equaled the shortfall in the country’s food production, the team took their plane back to the United States with the feeling of a job well done.

But the advice was wrong. However scientific the agronomists’ approach may have been, they could not compete with the accumulated local experience, based on thousands of years of potatoes growing in the Andes.

Chilean peasants, based all their lives in mountains, know that a wide variety of terrible things could harm their potatoes. There may be a late night frost in spring, or a caterpillar plague in summer. Mildew might destroy the plants before any tubers have formed, or winter might come too early. Over the years, each of these calamities has taken place from time to time.

Whenever the new calamities strikes, the peasants walk up to their fields and look everywhere – in the corners, behind the boulders, and amid the weeds – for the surviving potatoes plants. Only these surviving plants are immune to the latest plague. At harvesting time the peasants will carefully dig up the survivors and take the precious potato tubers back to their huts. They and their children may have to go through a winter famine, but at least they have next year’s seed potatoes from which a new start can be made. They are not locked into a particular set of farming practices, or a particular type of potatoes; they may be inefficient at times, but they have diversity bred into their everyday practice, diversity that allows them to meet unforeseen disaster.

By reducing the number of varieties in a potato, the monocropping approach guarantees a much higher yield in the short run, in the long run, it depletes the soil, diminishes the variety in the system, and threatens the health and life of the plants and animals living there.

Corporate system that aim at maximizing short-term proceeds, and disturb or cut out activities in the margin of the company’s “fields,” represent the business equivalent of monocropping. In the long run, the parable of the Chilean potato suggests that these companies have greatly diminished chances of survival.

By maintaining a certain level of variety within itself, the company is far more adaptable, because it is far more capable of responding effectively to the variety of forces that exists in this environment.

Intolerant companies can have long and healthy lives, provided that they have an appreciable amount of control over the world in which they live. The banking and insurance industries in many European countries lived for long times in this sort of world. So do many “postal, telephone, and telegraph” companies, as long as their telecommunications bailiwicks are strongly regulated. Under monopolistic conditions, a stable market or other conditions in which the company maintains control, the managers will do well to optimize efficiency. They will go for maximum results with the minimum resources. This minimization of resources inside the company requires intolerant management style. There cannot be much room for delegated authority and freedom of action.

Instead of growing potatoes in an open environment like the Andes, these intolerant companies are growing potatoes in a glass house, the horticulturist controls the amount of heat, light, fertilizer, and humidity in the environment 24 hours a day. Over time, like the horticulturist, managers of intolerant companies become more and more clever at finding the optimum, most efficient methods for growing the potatoes in a controlled environment. The managers’ structures and knowledge base get honed over time to deal with a familiar world, but there is little learning by making internal changes to fit a changing world.

The company will undeniably thrive for as long as the world remains stable. High tolerance, after all, is wasteful of resources. That is why a company with a lot of control over its environment has few reasons to be open or tolerant.

When the environment becomes unstable, however, there is a need for fast learning. Now, suddenly, the glass house cracks. The external environment, with all its unpredictabilities, reasserts itself. The managers must return to growing potatoes in the Andes. Diversity and openness are much better management dictums in those conditions.

Questions of tolerance are a fundamental part of a company’s ecosystem stance. Ecology does not only concern the relationship between a company and its surroundings. Equally important are the company’s relationships with the different personate inside itself: its individual members, its subsidiary companies, and its branches. To tolerate a variety of life forms within oneself gives a company the resilience to withstand stress and even disaster.

Companies such as Sumitomo, Du Pont and Intel found it easier to adapt because they had tolerance. Tolerance was the core quality that made is possible to diversify and decentralize, yet still manage the entity as a whole. These companies were particularly tolerance of activities in the margin: small, seemingly strange businesses that might have been pruned off the corporate rosebush elsewhere, but here were given as an outlet for endeavor.

When Du Pont needed to move into chemicals; Sumitomo into banking, or Intel into microprocessor, there was already a budding nexus of capability within the enterprise, ready to move into a new status as a core business. Moreover, because the company had been tolerant of this “bud” of new activity, it had been given time and room to emerge organically from the core structure. Thus its presence in itself demonstrated where the corporate entity as a whole might naturally and profitably move next.

In short, systems that deliberately introduce diversity into the product line – even at the expense of short-term proceeds – and allow activities to go on undisturbed in the margin of the field, have greatly enhanced chances of survival across the generations. These systems are tolerant. Tolerance systems survive.

Tolerance is a measure of openness of a system. The more tolerant a company, the more new people and ideas it can absorb and foster over time. Tolerance is a dynamic characteristic; it changes the composition of the company. Diverse people, products, and ideas require us to be patient with them; indeed, tolerance is patience. It requires time.

The long-term corporate survivors had made their changes in gradual, incremental ways – almost always in anticipation of customer needs. New business was not required to be relevant to the original business, and, above all, there was no central control over diversifications. They were often minimally financed or self-financing; often, they were simply the natural results of letting some group of inventors or creators within the firm have time to experiment and take risks.

Tolerance, in other words, is derived from value system. It can only exist in a company where people recognize the value of creating space for innovation. This is the reason why some companies set aside some pocket for innovation. In essence, these companies are creating pockets of organizational space in which innovation can emerge. The pockets tend to be hidden away in backwaters of the company. The senior managers trust them, don’t oversee them, keep them generally out of sight and out of mind and don’t worry about them - until they are needed.

As an example, in the early eighties the Japanese started beating Intel in the memory business. Intel’s performance started to slump when the entire industry weakened in mid-1984. Intel had been losing money on memories for quite some time while trying to compete with the Japanese producers’ high-quality, low-priced, mass-produced parts. But because business had been so good, Intel just kept at it, looking for the magical answer that would give Intel a premium price. However once business slow down, the losses really started to hurt. The need for different memory strategy, one that would stop the hemorrhage, was growing up. The senior managers had meetings and more meetings, bickering arguments, resulting in nothing but conflicting proposals. Meanwhile, as debates raged, Intel just went on losing more and more money. It was a grim and frustrating year. During that time the senior managers worked hard without a clear notion of how things were ever going to get better. Intel was bleeding and had lost its bearings. It was wandering in the valley of death.

The main question Intel faced was this: if Intel is not doing memories, what should its future focus be? Microprocessor was the obvious candidate. Its development was based on a technology developed in the corner of an old production plant. The process of adapting to change starts with the employees who, through daily work, adjust to the new outside forces. The Intel production schedules shifted wafer capacity from memories to microprocessors because the latter were more profitable. Intel was making its transformation from a “memory company” to a “microprocessor company.” Intel experimented with microprocessors for over ten years before the opportunity and imperative arose to make them the centerpiece of its corporate strategy. For number of years it spent more money on developing and marketing them than they generated in revenue. But Intel kept at it, its microprocessor business gradually grew and, when its circumstances changed in a big way, Intel had a more appealing business to focus its resources on.

Many successful moves were made when companies did not see themselves locked into a particular business, but in business with talents and resources that could be used profitably to meet a variety of consumer needs. Successful companies, in short, were free to go against the grain because they had been cultivating, within themselves, a wide variety of potential activities.

Life is path that you beat while you walk. This line embodies the most profound lessons on planning and strategy. When you look back, you see a clear path that brought you here. But you created the path yourself. Ahead, there is only uncharted wilderness. You do not navigate a company to a predefined destination. You take steps, one at a time, into an unknownable future. There are no paths, no road ahead of us. In the final analysis, it is the walking that beats the path.

This cycle of seeing, reflecting, concluding, deciding, and acting is, of course the cycle of continuous learning. In this sense, strategy is simply the development of the organization’s ability to learn. Without an effective learning, a company cannot hope to evolve effectively in an unpredictable world. The organization’s ability to learn faster (and possibly better) than the competitors becomes its most sustainable competitive advantage.