A DAPTIVE E NTERPRISE

A DAPTIVE E NTERPRISE
Creating and Leading

Sense-and-Respond

Organizations

S TEPHAN H. H AECKEL
Foreword by
Adrian J. Slywotzky

HARVARD BUSINESS SCHOOL PRESS

Boston, Massachusetts
Copyright © 1999 President and Fellows of Harvard College

All rights reserved

Printed in the United States of America

03 02 01 00 99 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Haeckel, Stephan H.
Adaptive enterprise: creating and leading sense-and-respond
organizations / Stephan H. Haeckel; foreword by Adrian J.
Slywotzky.
p. cm.
Includes index.
ISBN 0-87584-874-5
1. Organizational change—Management. 2. New business
enterprises—Management. 3. Management. 4. Corporate
culture.
I. Title.
HD58.8.H34 1999
658.4'063–dc21 98-33201
CIP

The paper used in this publication meets the requirements of

the American National Standard for Permanence of Paper for
Printed Library Materials Z39.49-1984.
In memory of my father

Lester C. Haeckel

who had nothing

and everything

to do with this book

 CONTENTS

Foreword ix
by Adrian J. Slywotzky

Introduction xvii

CHAPTER 1 The Premise and Promise of 1

Sense-and-Respond

CHAPTER 2 Unpredictability: 23
The Only Sure Thing

CHAPTER 3 Strategy: 37
Past and Future

CHAPTER 4 The Sense-and-Respond Alternative 51

CHAPTER 5 Adaptiveness: 75
Finding Meaning in Apparent Noise

CHAPTER 6 The Role of Leadership in 93

Sense-and-Respond Organizations

CHAPTER 7 Building Organizational Context 113

CHAPTER 8 Coordination: 141

Keeping Track of Who Owes What to Whom

CHAPTER 9 Managing by Wire 163

CHAPTER 10 Managing the Transformation: 173

A Case Study

CHAPTER 11 Changing the Corporate DNA 191

viii C O N T E N T S

APPENDIX A Creating the Modular Organization 207

by Michael Shank

APPENDIX B Collaborative Decision-Making in Adaptive 225

Enterprises
by Michael Kusnic and Daniel Owen

APPENDIX C Putting the Commitment Management 243

Protocol to Work

Notes 249

Acknowledgments 265

Glossary 273

Bibliography 277

Index 285

About the Author 295

 FOREWORD

Adrian J. Slywotzky

For some time now, I’ve been following the development of a

strategic model called sense-and-respond, formulated in a variety
of articles and whitepapers by Stephan Haeckel. Haeckel’s point of
departure is the logic of an information economy and the implica-
tions of that logic for business strategy, structure, and governance.
My own approach to strategy is more empirical: unearthing the
business design choices that explain why certain successful com-
panies have been able to sustain their success over decades. Inter-
estingly, both roads lead to a common strategic imperative: What a
company does these days must be driven by a deep understanding
of how customer needs are changing, customer by customer. I find
the ideas and logic of sense-and-respond compelling, and I am de-
lighted that they have now been gathered into a book.
Adaptive Enterprise deserves to be read carefully from be-
ginning to end. It contains a degree of prescription rare in “idea
books,” including the several very good ones that have appeared in
the last few years describing how the business landscape is chang-
ing and how the rules determining business success have been
fundamentally altered.
Very few of these great diagnostic books provide usable ideas
on how to integrate a management concept for dealing with the
unpredictable change they describe. Adaptive Enterprise falls into
a different category. Haeckel provides not only insightful diagnosis
but a persuasive prescription for creating new business designs
that systematically make sense out of turbulent change and re-
spond adaptively to it.
ix
x F O R E W O R D

To be sure, following the prescription is not easy. But then,

no significantly new model for creating value is ever easy to inter-
nalize. You must change the wiring in your mind from make-
and-sell (which has been deeply imprinted into our thinking) to a
different mode—sense-and-respond. Implementing this transfor-
mation involves a conceptual as well as an operational challenge.
Among other things, it requires shifting from a product-centric to
a customer-centric way of looking at things.

T HE T RANSITION TO A SENSE -AND -RESPOND

B USINESS D ESIGN

Haeckel maps stages in the transformation to sense-and-

respond against the four strategic choices that define a firm’s busi-
ness model: customer selection, value capture, scope definition,
and strategic control point. Stark and revealing differences emerge
from stage to stage.
The parameters of a business’s scope, for example, differ
greatly in a sense-and-respond organization as compared to make-
and-sell: They are not the traditional markets served and prod-
ucts offered. Rather, because increasing unpredictability about
what products and services customers will want is a built-in fea-
ture of information economies, the sense-and-respond firm de-
fines its scope in terms of first, the repertoire of personalized cus-
tomer value attributes it will address, and second, the repertoire
of capabilities that can be marshaled by the firm into responses.
Even more significantly, the firm has the ability to systematically
and dynamically change its scope in response to signals from the
environment.
What Haeckel calls customer-back behavior closely resem-
bles the customer-centric approach that characterizes many of to-
day’s most successful companies. He describes it this way: “The
search for the next profit zone begins with an ability to sense and
interpret changes in the customer value zone.”
It’s true. Examples such as the Plastics Division of General
Electric (described in detail in my book, The Profit Zone) demon-
strate that a firm can provide significant and differentiating value
to its customers by exploring the larger economic system of which
 F O R E W O R D xi

their specific requests are a part. Often this leads to insight about
value of which customers themselves may be unaware—because
their businesses are fragmented into independent parts. Cus-
tomer-back means making investments to find patterns your cus-
tomers don’t see and responding with extended value propositions
of which preexisting products and services are only a part. It
means making sense out of influences on customers’ businesses
that they still think of as noise—factors that don’t even show up as
meaningful blips on their current radar screens. GEers are fond of
saying, “We’re not smart enough to predict the future, so we have
to get better at reacting to it more quickly.” You couldn’t ask for a
better articulation of the sense-and-respond imperative.
This change in mindset will no doubt come more easily for
some, such as investment bankers, engineering firms, consultants,
and others accustomed to constantly reorganizing themselves
around customer requests. It will be very difficult for manufactur-
ers, bankers, utilities, and other firms accustomed to organizing
themselves around their own production capabilities. But the ab-
solute necessity of facing up to this shift applies to us all.
Adopting a sense-and-respond orientation produces multiple
benefits for an organization. I’d like to point out three benefits
over and above those articulated by Haeckel: new business build-
ing, solving the medium-term growth crisis, and preempting future
competitive opportunities.

N EW BUSINESS BUILDING

One of the major obstacles to effective new business building

by large companies is the “Big Opportunity” trap. To varying de-
grees, we are all caught in it. It works like this: “We’re a $20BB
company. If the new business proposal is not a $1BB opportunity,
we don’t have time to pursue it.”
The consequence of falling into this trap? Dozens of good, prof-
itable but apparently “small” new business ideas are killed. The
silent assumption underlying their execution: We know what the size
of the opportunity will be. But, in reality, we are clueless. Another
reality: Many of these dozens of discards go unrecognized as bridges
to the next opportunities in a constantly unfolding marketplace.
xii F O R E W O R D

Standing in year one, it’s hard—often impossible—to say

whether the rejected new business (which seems to have “only” a
$100MM potential) is a stand-alone opportunity or a significant
bridge to a future profit zone. If the latter, is it a bridge to an is-
land? An archipelago? A whole new continent?
The point is, you don’t know. You can’t tell. The more rapidly
the market changes, the more difficult it is to assess the bridge
value of a business. But if you’re not building these apparently
“small” (and, incidentally, profitable) bridges, you shouldn’t com-
plain that somebody else got to the new continent first. The capa-
bility to systematically sense important opportunities while they
are still small will become a survival trait as change becomes more
and more unpredictable.

M EDIUM -T ERM GROWTH CRISIS

The second benefit of sense-and-respond behavior relates to

the medium-term growth crisis that plagues most of the Fortune
500. The crisis develops this way:

• The best business managers in the company are put in

charge of operating units.

• They focus completely on the next four quarters, and they

operate in make-and-sell mode because that’s the only way
they know to make their numbers in the short term.

• Meanwhile, numerous highly talented people and high value

new business ideas percolate in R&D. (Most of these ideas
have zero potential in year one and enormous potential in
years two to five.)

• But the near-term focus of the best management talent leaves

these R&D people with no one on the business side to talk to
about investing in the commercialization of those new busi-
ness ideas.

• As the unending sequence of “four quarter horizons” rolls on,

the company’s “new growth” gap gets bigger. After a few
years, it becomes insurmountable.
 F O R E W O R D xiii

Companies that learn sense-and-respond behavior will begin

redeploying some of their best business talent from make-and-sell
activity. Even a 5 percent shift will have dramatic consequences,
because sense-and-respond forces companies to look outside
themselves to their customers and to look two or three years for-
ward. Having 5 percent of the talent looking “outside” will greatly
improve the odds that the company will sense the next major op-
portunities.
On the response side, R&D will gain managerial dialogue
partners with proven abilities to make things happen. The result
will be profitable connections between emerging customer priori-
ties and new organizational capabilities. In those cases where the
company doesn’t have the needed capabilities, it will get them,
driven by the attractiveness and immediacy of the opportunity.
Sense-and-respond, as it becomes the dominant mindset, will con-
stitute the company’s key mechanism for creating the “next act”
for growth, even as most of the managerial talent still thinks make-
and-sell and the next four quarters.
The experience of a high-tech make-and-sell communica-
tions equipment maker illustrates the benefit of making this shift.
This company’s behavior was driven by what it knew how to do; its
mindset was dominated by core competency thinking. Attracted
by the emergence of a major potential new market, it experi-
mented with building a next generation business model driven by
opportunity rather than core competency. The new market oppor-
tunity was very attractive, but required several new skills and
competencies.
Abandoning “what got us here” wasn’t an easy process. An
ongoing debate emerged between managers whose starting point
was “what we know how to do,” and those whose thinking was
driven by “what customers want, and where future profit will be.”
Ultimately, the latter mindset prevailed. But the debate cycle ex-
tracted a cost. The company’s new business model was created a
full twelve months behind the leader in the new market space.
But the leadership learned, as Haeckel says, “how to play
games with customers, rather than games against competitors.”
Even as it was introducing its new business model, the company
was already beginning to sketch out its next business design based
on early feedback from its leading customers. At its current rate of
xiv F O R E W O R D

progress, the new business design will hit the market months
ahead of the competition.

A NTICIPATE AND P REEMPT

The third benefit grows out of the second. Playing sense-and-

respond reinforces itself. Once a company gets into a dynamic
mindset, it learns; it gets better. Its know-how extends beyond
archery, aiming at a static target, to include skeet shooting, taking
on a moving target. As the company develops its sense-and-
respond skill set, it elevates sense-and-respond from listen and
comply to anticipate and preempt.
Sense-and-respond helps us be on time—on market time.
Very good sense-and-respond helps us be early. But a superior abil-
ity to sense and interpret signals about changing customer needs
before they mature into formal requests helps us get there sooner
still, soon enough to preempt the next major opportunity and to
create an unassailable leadership position. This is the core of cus-
tomer-back behavior: investing in a relationship that provides
privileged and unique access to signals about changing customer
patterns so they can be leveraged to enhance customer value.
Anticipate and preempt has tended to be the preserve of fast-
moving, close to the customer, risk-taking entrepreneurs. As a re-
sult, the majority of value migration winners in the last decade
have been newcomers, not incumbents. But no law says that it
must be this way. Several notable exceptions show that incumbent
stagnation, far from preordained, is something incumbents allow
to happen. Operating in rigid make-and-sell mode helps to stack
the odds in favor of the newcomer’s initiatives. Operating in a
sense-and-respond mode shifts the odds back in favor of the in-
cumbent.
Moving a company away from pure make-and-sell to a hybrid
operating mode dramatically lowers the incumbent’s risk of “eco-
nomic arteriosclerosis.” It initiates a mind shift and skill shift that
paves the way for anticipate and preempt. A process of learning
and skill development results that enables sustained profit and
value growth for the organization.
 F O R E W O R D xv

I cannot emphasize enough that the transformation to sense-

and-respond—particularly for large organizations—requires a fun-
damentally different way of thinking about how companies create
value. The story of the past two decades shows that the firms cre-
ating the most value change their business designs every five years
or so. This book explains why that follows unavoidably from doing
business in an information economy—and why the life cycle of
business designs will continue to shrink.
Adaptive Enterprise will influence the influencers of busi-
ness thought. Its contribution lies not simply in describing sense-
and-respond as a required behavior but in presenting it as a con-
ceptual model for the post-industrial corporation—a prescription
for designing and operating businesses that can continuously, sys-
tematically reinvent themselves.
 INTRODUCTION

Increasingly unpredictable and rapid change follows un-

avoidably from doing business in an Information Age. What could
be more strategically important than coming to grips with the im-
plications?
The message of Adaptive Enterprise is that large, complex
organizations must and can adapt systematically—and success-
fully—to this kind of change. Systematic is a property of the
sense-and-respond model described in this book. Success will be
determined by leadership’s competence in making a particular set
of choices within the model framework.
The only kind of strategy that makes sense in the face of un-
predictable change is a strategy to become adaptive. Speed-
to-market, customer intimacy, operational excellence, and organi-
zational agility, however important, are not adequate strategic
objectives in and of themselves. They are attributes of the real ob-
jective: successful and systematic adaptation. Adaptation implies
more than agility. It requires appropriate organizational response
to change. And when change becomes unpredictable, it follows
that the appropriate response will be equally so.
In this environment, therefore, planned responses do not
work. If the underlying reality is an inherent unpredictability in
what customers will actually need, having sufficient organizational
agility to get to market first with quality offerings based on cus-
tomers’ predictions of what they will want is a fool’s errand.
This is why complexity theory has recently attracted atten-
tion as a new way of thinking about strategy. Certain (but not all)
xvii
xviii I N T R O D U C T I O N

systems operating far from equilibrium consistently demonstrate

an ability to self organize and display emergent properties that en-
able them to adapt in unpredictable environments. Why not
reconceptualize businesses as complex adaptive systems? Compa-
nies will no longer have to develop appropriate strategies—they
will simply emerge. Strategy collapses into a universal imperative:
Become a complex adaptive system. Next case.
Complexity theory has an enormous amount to contribute,
and some of its principles constitute major underpinnings of the
sense-and-respond model. But it is insufficient, because it does not
address the unique properties of social systems—which is pre-
cisely what human organizations are. Individuals can and do make
decisions within the system about the system. These decisions in-
clude if and how to change their own behaviors inside the system,
the structure and rules of the system, and even its purpose. For
this reason, the sense-and-respond model adds intentionality and
purposefulness to complexity, adaptiveness, and system as essen-
tial organizational properties.
An enterprise’s ability to adapt depends on how it processes
information. From complexity theorists we learn that all success-
fully adapting systems have something in common: They trans-
form apparent noise into meaning faster than apparent noise
comes at them. Sense-and-respond organizations leverage this in-
sight into a generic way of fostering adaptive sensemaking and ac-
tion. The particulars of what is sensed and of how it is interpreted
are role-specific, and depend on the amount of adaptability re-
quired. No role requires more careful design of its adaptive loop
than the one accountable for translating apparent noise into
meaning about when and how to adapt the way the organization
adapts. That role, of course, is leadership.
Unpredictability implies that organizational behavior must
be driven by current customer requests—tacit as well as articu-
lated—rather than by firm-forward plans to make and sell offer-
ings. Customer-back adaptiveness means dispatching capabilities
on demand, as opposed to scheduling them efficiently in advance.
This, in turn, implies a modular organizational structure, which
cannot be effectively managed with a command and control gover-
nance system.
 I N T R O D U C T I O N xix

The sense-and-respond model addresses these issues first, by

organizing information in a specific way to represent and support
systematic adaptiveness by key roles in the firm (the adaptive
loop); second, by organizing assets and capabilities as a system of
modules that can be dynamically dispatched into one-off value
chains (modular organization); and third, by replacing command
and control with a commitment-centric governance system that
propagates the purpose, bounds, and essential structure of the
business throughout the organization. It manages the interac-
tions—rather than the actions—of modular capabilities through a
universal and general commitment management protocol (a tech-
nology-assisted commitment management system).
A sense-and-respond organization, then, is a collection of ca-
pabilities and assets managed as a purposeful adaptive system.
This presupposes an ability to manage organizations as systems—
an idea too rarely preached and almost never practiced in today’s
large enterprises. The theme threads its way through this entire
book, because a deep appreciation of this concept will be vital to
the leadership of sense-and-respond organizations.
In this book the term sense-and-respond refers both to a
type of organizational behavior and to a specific prescription for
systematically achieving it. Sense-and-respond behavior, that is,
the triggering and determination of a firm’s operations by the re-
quests of individual customers, characterizes many small and
some intermediate-sized organizations, but only a very few large,
complex ones. (Some systems integrator firms come to mind.) The
sense-and-respond model is a new conceptual design for produc-
ing this behavior economically and at large scale. Its successful
implementation will require the adoption of some new concepts,
new tools, and new leadership competencies. As yet, no complete
exemplars of the sense-and-respond model exist. But prototype
implementors have put its various parts into practice.
The prescription is radical. The first few chapters of Adap-
tive Enterprise, therefore, will establish the conditions under
which leadership will find it imperative to undertake the required
transformation. A detailed description of sense-and-respond be-
havior and some of its important underlying concepts follows.
Subsequent chapters explore elements of the sense-and-respond
xx I N T R O D U C T I O N

model, the responsibilities of leadership, and the early experi-

ences of some sense-and-respond pioneers. Examples help flesh
out sense-and-respond theory, bringing it to life in the context of
real companies dealing with difficult cultural and business issues
as they work through this transformation. These chapters also de-
scribe several principles and some early conclusions about good
practice.
We will need books that explore the learning curve of shaping
and managing successful sense-and-respond organzations. They
will be written as good practice emerges from those who commit
themselves to the transformation from offering to responding. But
these practices will have to be grounded in a model with sound
conceptual underpinnings. First things first.
I believe readers need to understand the theoretical building
blocks of sense-and-respond so that they can draw their own con-
clusions about the quality of its foundations and the logic used to
synthesize them into a model. But I also recognize that the case
for sense-and-respond should be presented as simply and clearly
as possible, without diversionary excursions into complexity the-
ory, systems theory, information theory, decision theory, com-
puter science, or linguistics. To resolve the conflict between these
two needs, I have used endnotes and appendices to expand on
some of the core ideas behind sense-and-respond. Michael Shank’s
description of modular organizations in appendix A, and the dis-
cussion of adaptive decisionmaking by Michael Kusnic and Daniel
Owen in appendix B, make particularly important contributions.
The references and bibliography will be useful to those who want
to delve more deeply into these and other subjects.
As the reader will discover, I believe that the careful use of
words is very important for leaders as well as authors—especially
when using familiar ones to explain something new. Words such as
leadership, accountability, commitment, collaboration, trust,
process, procedure, and governance mean many things to many
people, but they have very specific meanings in the sense-and-
respond model. For ease of reference, the sense-and-respond def-
initions of these and other important terms are provided in a
glossary.