And Gregory Bateson pointed out, “The major problems in the world are the result of the difference between how nature works and the way people think [it works].”

The world today faces several major problems, in economy and business, in energy, environment, food, water…

As we plan how to respond, our actions are driven by our beliefs. So it makes sense to be open to the idea that those problems may have been caused by mistakes in our very thinking in the first place. Rather than making things better, our ‘solutions’ may be making the problem worse.

This linked article describes how a different approach is having better results.

It proves that the received wisdom can be wrong — wrong to the extent that it actually has the opposite effect to the one intended.

And it shows that strong, healthy nature can coexist side-by-side with better results for humans.

You can read the full article here, and a brief extract below.

What we call ‘problems’ are actually an opportunity to improve our understanding of how the world really works.

In Africa and in West Texas, the standard technique for reinstating overgrazed land is to allow that land to rest. But this leads to desertification, something that the arrival of man has done since ancient times.

What is needed instead is a tight herd of grazing animals. This concentrates their fertilising manure and urine into a relatively small space, and churns it into the ground with their feet. In nature this happens when large herds of grazing animals (such as wildebeest) face healthy numbers of predators (such as lion).

A cattle farm in Africa has been mimicking nature’s way. Cattle are managed in tight herds, and the result over 45 years has been to increase the number of cattle the farm can support from 100 to 500 animals. That improves the land for wild animals, which are then kept in herds by predators, again improving the soil. Even elephant are useful — they push over trees during the dry season, eating some foliage and leaving the rest as fodder for the cattle.

The result: “A successful cattle operation, depending for its success on masses of wildlife – it flies against all common livestock management techniques.”

Meanwhile a piece of rangeland on the farm that has been managed according to orthodox techniques is turning slowly into desert.

The world today needs to question orthodox approaches and beliefs.

And the most fundamental belief of all that needs to be reintroduced is to realise that good quality human life and good quality natural life can coexist.

The article explains how crop yields there have been falling dangerously low, and how the traditional approach of ‘adding more fertilisers’ is no longer working.

A new approach, called ‘agroforestry’, involves working more closely with nature — and is having great results. In this particular example it involves the planting of ‘fertiliser trees’: trees that protect the soil from the sun, and increase both its moisture and its nutrient content.

This is interesting for two reasons.

First, because the shift to a more sustainable system approach to farming is creating new opportunities for businesses in these areas. In this case the demand for seeds of these ‘fertiliser trees’ is outstripping supply.

And second, because our whole western economy is facing problems similar to the farmers in sub-Saharan Africa: our traditional approach to add more fertiliser (‘increasing the existing money supply’) simply is not working. Our ‘land’ is drying up.

We need the economic equivalent of a ‘fertiliser tree’. What would one look like?

Finding it would be like finding the natural equivalent of a money tree…

Excerpt:
Across the drylands of the Sahel, close to the edge of the Sahara, crop yields are falling as increasing demand from growing populations mean the soil is not given the dozen or more years it has traditionally been allowed to lie fallow before being planted again.

Fallow periods have dropped to two years or less, sapping the land of the organic material that makes it fertile, and creating a concrete-like surface that cannot absorb the rain when it does come.

Artificial fertilisers allowed this new, more intensive, system to work for a while. But now the rising price of oil is making those fertilisers unaffordable. And the outlook is that millions of rural poor will migrate to the cities, or even into Europe, pushing down the price of unskilled labour (wherever they turn up), just as the price of food continues to rise…

But in some parts of Mali, close to the Sahara desert, farmers reaped a bumper crop last year. And villagers now have enough food to take them through the dry season.

The reason? They have been following the advice of the World Agroforestry Centre and planting trees — trees that fertilise the soil (both by dropping leaves, and by bringing nutrients and water up from deep below the surface), protect it from the sun (so that raint that falls is more easily absorbed back into the ground), and so reversing years of soil degradation.

Yields from farming this way can be two to three times higher, and the ‘fertiliser tree’ approach is being applied in Malawi, Ethiopia, Tanzania, Rwanda and Zimbabwe.

What would it take for business to do the same?

Full Story:
http://souciant.com/2012/02/fifty-million-at-risk/

http://www.ted.com/talks/lang/en/clay_shirky_on_institutions_versus_collaboration.html

This is not good news for US citizens, or business. People who are rioting do not make good customers, or employees. And sales may increase for companies in the ‘personal security’ industry, a climate of civil unrest is likely to make things even worse for the rest of the economy.

As a man who escaped first Nazis and then communists in his native Hungary, and then went on to make $1bn in a single day from the collapse of the ERM, his opinion surely deserves to be listened to.

This piece on Russian news site rt.com summarises the Newsweek article and adds some supporting evidence of its own:

• Two thirds of adults questioned in a recent Pew Research survey apparently said that they agreed “strong” or “very strong” conflicts exist between America’s elite rich and the poor.
• And while the passing of the recent National Defence Authorisation Act makes it lawful for the US government to indefinitely detain and torture American citizens suspected of terror crimes without ever bringing them to trial, the proposed Enemy Expatriation Act would allow the US government simply to revoke citizenship without trial from anyone deemed a threat.

Back to George Soros.

“The situation is about as serious and difficult as I’ve experienced in my career,” he tells Newsweek. “We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario”, he says, “is a deflationary environment. The worst-case scenario is a collapse of the financial system. …At times like these, survival is the most important thing.”

As Newsweek explains, “He doesn’t just mean it’s time to protect your assets. He means it’s time to stave off disaster.”

‘Staving off disaster’ means saving the financial system from collapse, retaining the euro as an economic unit and zone, and removing the “evil” he sees in the financial system.

It also means, in our view, that once we have stepped back from the edge we need to point the world in a direction that takes us away from the place that we have got to. And since equality is one of the key measures he uses to identify the problem, reducing equality is one of the solutions.

The traditional response has been to form an institution.

The newly-emerging solution (in 2005) is to enable cooperation through infrastructure tools — essentially internet 2.0.

What Clay explains is that the days of the traditional solution are numbered — because they fail to capture some of the potential value that is created by the looser, cooperative model, and they add extra costs (of management control).

The changes this will bring will arrive “one arena at a time”. How it will turn out is unclear. But you could argue that the ‘Arab Spring’ and ‘Occupy’ movements of 2010 were a natural outcome of the process he is describing.

And the exciting thing is that the underlying change will be to shift our organisations from being obstacles to becoming enablers of value creation.

Permabusiness takes this information and looks at what would come next — both for the financial system and the wider economy.

Unexpectedly, we find stories in the news that indicate this is already happening.

Tom Murphy, professor of physics at the University of California (San Diego), has written two detailed blogs on the scientific reasons why energy use and economic activity cannot grow forever.

When we use energy, for example, we heat up the surface of the earth. Each of us only heats the earth a tiny bit, and normally that just radiates away into space. But Tom shows that if we continue to grow our energy usage at the rates we have been doing, then the laws of physics mean that within a few hundred years the earth will become hotter than boiling water.

This means that the economy can only continue to grow if more and more of it is taken up with activities that use very little energy: financial services, buying and selling houses, haircuts, psychotherapy. In order for the economy to continue to grow, these activities would need to become such a large proportion of the economy that activities like manufacturing, transportation, energy generation and growing food were negligible by comparison.

But we have a word for what happens when the prices of items not connected to the real world grow much larger than the prices of physical items — we call it a ‘bubble’.

As Tom Murphy says, “Adam Smith imagined a 200-year phase of economic growth followed by a steady state. But our mentality is currently centered on growth. Our economic systems rely on growth for investment, loans, and interest to make any sense. If we don’t deliberately put ourselves onto a steady state trajectory, we risk a complete and unchoreographed collapse of our economic institutions.”

So that means our financial system has to change. A financial system based around compound interest works fine when the world economy is growing. But when we finally reach ‘globalisation’ the rate of growth has to slow. And when global manufacturing capacity exceeds demand (as it currently does) then we have ‘recession’. We have reached a limit. Compound interest can no longer be paid.

At that point a borrower or class of borrowers somewhere in the system will default on the compound-interest payment schedule they had agreed previously. Their default will then ripple through the financial system, as we have seen.

The solution is to create a new shared-consensus, a shared realisation and agreement, that compound interest can no longer be paid. This will not happen overnight. But until it does the system as a whole cannot shift to a flat-interest, or even a zero-interest or negative-interest lending system.

This may sound completely unrealistic, but it has actually happened this week. On Monday, for the first time, Germany issued debt with a negative yield. Investors agreed to pay the German government for the privilege of lending it money (see also this analysis) in return for increased confidence that they will get back a larger proportion of their money. For them the mix of risk/reward from buying German bonds with negative yield is better than the return they think they can get from investing in currencies, commodities, or the shares of corporations.

Once the view of a large part of the total financial system has shifted to this new consensus, then the real economy of businesses can begin to make plans on this new basis and can also shift to a new mode.

What would businesses operating in a non-growth economy look like? How could we optimise economic activity in a post-growth economy?

At a detailed level, this is what the whole permabusiness project is about. At a high level we can say that the Ecotron experiments give a glimpse of what it is likely to look for the whole economy.

The Ecotron experiment created a series of closed ecosystems (in a laboratory) that each contained different numbers of species of plants and animals. Each ecosystem is like a model of an economy.

What the experiment found was that:

1. Plant productivity was highest in more complex ecosystems — this range of species allows the total ecosystem to make use of the greatest proportion of the available sunlight
2. These ecosystems were also more resilient to stress situations like drought — ecosystems with a smaller number of species would collapse more easily

(You can read more detail here.)

This seems to imply that we expect a future ‘steady state’ economy would be largest, and most resilient, when there is a large variety of different businesses operating within it. An economy with a smaller number of dominant businesses would have a lower total GDP, and would be more vulnerable to recession or resource shocks etc.

Perhaps the recent focus on medium-sized businesses as a key source of growth has something to do with this.

He paints a clear picture that runs from the strategic rise of China to the practical need for better education, less regulation, more environmental responsibility, and more socially-inclusive wealth creation.

“There is no economy in the world, whether low-income countries, emerging markets, middle-income countries or super-advanced economies that will be immune to the crisis that we see not only unfolding but escalating.” [Source]

it is time to take stock of where we are and make plans for the future.

The first step is to understand the key forces driving change.

What are the key trends and drivers shaping your business, your industry and business in general?

Our answers for business in general are included below. In the new year we will look at what to do about them.

In the meantime, have a great Christmas/Holiday period.

(And do let us know what here you agree with, and what you think we’ve left out.)

The future business environment will be shaped by forces under nine key headings:

• Political/economic
• Energy-related/environmental
• Social
• Technological
• Supplier power
• Customer power
• Industry competition
• New Entrants
• Substitutes

(For background explanation, see here.)

The following sections examine these one by one:

Political / Economic:

• As Eurozone crisis continues to inch forward, the possible outcomes are becoming more extreme: either stronger union or complete collapse
• A lack of clear political leadership two months ago has crystallised 27 European countries into “26+1″: 26 working closely together, UK standing apart
• US legislature is increasingly confrontational: unable to agree a budget; passing laws on China currency levels, detention without trial for suspects; making military equipment available to police forces; using ‘Homeland Security’ measures against unarmed civilians
• US economy seems to recover; Europe’s flounders; China’s weakens with fears of construction bubble; emerging economies affected by reduced demand, higher inflation, and also opportunities to supplant existing interests
• Global financial markets volatile as investors act as a herd, all seeking safety or risk
• Collapse of MF Global reveals more corruption / lack of ethics in the system
• Prices of oil and gold behave unconventionally. Oil takes on some characteristics of ‘currency’. Gold falls in crisis as individuals sell to cover losses elsewhere.
• In UK, only manufacturing and mid-sized companies seem to offer growth.
• [For these specific stories and more, click here]

In summary:
In politics and financial markets, the crisis are characterised by increased volatility between opposites, a polarisation of views. Each opposing view is valid and offers a possible way forward, but neither seems compatible with the other.
The impacts are being felt in every economy in the world. The whole world is involved.
Growth predictions have been slashed and are being slashed further. Emerging economies (including China) can no longer be relied on to provide growth.
And despite the polarisation, it is countries with a strong welfare model (relative equality/non-polarisation) that seem to have weathered the financial crisis best.

For business this means an uncertain future. There are forces for change pushing strongly in opposite directions, so the outlook is difficult to predict. The only current certainty is for volatility — which will place existing business models under pressure, and create opportunities for new business models.

Energy / Environmental:

• Oil prices have risen higher and become more volatile. Shell’s CEO says this will continue for the foreseeable future.
• German Bundeswehr publishes its report on peak oil in English, predicting severe impacts on economies and on issues of national defence
• UK faces energy gap in 2-4 years
• “EU faces 20 years of rising electricity costs”
• The level of investment in renewable energy passes investment in fossil fuels
• A tipping point for the cost of solar electricity could be reached in 2-3 years.
• Massive floods disrupt homes and businesses in Australia. Severe US drought affects crops.
• Thai floods are cited as one of three factors knocking Sony into $0.8bn loss
• Oceans in crisis — 90% of stocks of big fish eaten since 1960
• Ocean chemistry now primed for mass global extinctions (on land and sea) within 30-50 years
• Massive die-off of trees, worldwide
• [For these specific stories and more, click here]

In summary:
Energy is the lifeblood or our economies and we are facing rising prices and reduced supply of that energy. Investments in renewable energy have passed those in fossil fuels, so the rate of change is in the right direction. But it seems likely that the rate of new generation will lag demand: that is, although in the long term we may return to abundant energy, in the short term we are likely to see shortages.
Extreme weather events are increasing in size and frequency. The financial impacts on business are increasing. Almost all environmental indicators are worsening, not improving.

The impact for business is two-fold: we can generally expect the costs of energy and disruptions to supply to gradually increase; almost completely unpredictable are the extreme weather events that will bring severe disruption to businesses (either directly or via their customers, suppliers, and employees).

Social:

• Large-scale redundancies, pay freezes
• Squeeze of the middle classes, who have decreasing share of national wealth and income
• Rising food prices, rising energy prices leave less disposable income to spend on other items
• This feeds back into a global economic slowdown is blamed on ‘lack of demand’
• Large pay increases continue at director-level
• Rise of barter, ride-sharing, … as alternatives to the ‘mainstream’ economy
• Sudden, strong emergence of movements for democracy in ‘Arab Spring’  and ‘Occupy’, supported in some areas, violently repressed in others.
• [For these specific stories and more, click here]

In summary:
Increasing social inequality is leading to a increasing push-back against that inequality, and the search for alternative systems. The establishment response has often been quite severe, not just in the Middle East.
Again, the system is showing bifurcation: a choice between a future of increased inequality and (essentially) fascism, or decreased inequality and the rise of democracy.

Impact for business in the west: the concentration of wealth and income into fewer hands, combined with increased spend on the essentials of food and energy, leaves less money circulating in the economy. It separates existing business models into winners and losers. It also creates opportunity for new solutions to the problems people are facing.

Technological:

• Investments in renewable energy generation surpass those in fossil energy
• Forecast of ‘Tipping point’ in price of solar panels during next 2-3 years
• McKinsey report shows existing model of resource production/use cannot continue in next 20 years
• Huge deposits of rare earth minerals found on sea bed around Hawaii mean high tech developments can continue, but environmental impacts not considered
• Cybertheft and cyber-warfare on the increase
• New models for ecosystem-friendly agriculture and business being developed
• Samsung increases smartphone sales four-fold in 12 months, passing Apple
• [For these specific stories and more, click here]

In summary:
While economies in general are stagnating, technology companies provide rare success stories, which shows that people will pay for new ways of doing things. In particular, Samsung shows that even while the economy as a whole is stuttering, it is possible to increase sales four-fold, and beat an entrenched market leader. To do this it needed not only strong information technology, but also a strong business model (which is another kind of ‘technology’).
More widely we see growth two opposing futures for technology use: on the one hand technology is enabling new forms of conflict (cyber-warfare, cybercrime); on the other hand, new ecosystem-friendly technologies are emerging (eg biomimicry, energy generation, agriculture).
A feared lack of key rare earth minerals that threatened to stall technological development has been put to rest by the discovery of huge deposits around Hawaii. But the environmental impact of extraction is unknown.
More strategically, McKinsey research shows that our current ways of producing and using the key resources of food, water, energy and industrial materials, cannot continue as an extrapolation of the present. Radical innovation is needed.

The outlook for business: there is increased demand for better ways of doing things. If your business is one of the innovators, this is an opportunity. If you are one of the laggards it is a threat. This applies to ‘technologies’ in the broadest sense — ways of doing things — not just to information technologies.

The above are some of the key trends and drivers in the political, economic, energy, environmental, social and technological arenas.

What effects are these having on Supplier power, Customer power, Industry competition, New Entrants and Substitutes?

Suppliers:

• Global economic slowdown results in an excess of capacity
• Supplier power is weak
• (Add specific items from your own industry here…)
• [For these specific stories and more, click here]

In summary:
There is excess capacity of existing products and services, within a worsening economic situation. This presents two ways forward.

One way is to shrink the existing business model. The other is to innovate new products, services and ways to deliver them, in order to help alleviate the increasing pressure being felt by customers.

There is excess capacity in existing products and services. But there is under-capacity for highly sought-after new products and services.

Customers:

• Customer power is stronger than usual
• This has resulted in falling prices and reduced output in several industries
• But customers themselves have little power, since their own ability to buy has been reduced
• (Add specific items from your own industry here…)
• [For these specific stories and more, click here]

In summary:
Although customer power is stronger than usual, their own position is also weak.

Industry Competition:

How are the above trends and drivers affecting different industries?

• Non-food retailing is down as costs of food, fuel and utilities increase.
• But even food giant Cargill’s profits are down two thirds because of impacts from volatility of  financial markets
• Industrial metals (such as copper, zinc, platinum) connected to ‘real economy’ activities show more price stability than precious metals (silver, gold)
• Some groups seek refuge in consolidation: Mobile phone operators consolidate in face of rising infrastructure costs, lower revenues; Yahoo and ABC News pool online resources
• Others improve performance despite difficult times: ‘Bellwether’ engineering group ABB publishes Q3 results slightly up; Samsung grows smartphone sales four-fold; Lipton Tea grew market share by redesigning its entire business model to make the brand 100% guaranteed environmentally and socially sustainable.
• Some find new opportunities in the crisis: emerging-market bourses agree to cross-list each others’ futures and options, increasing the interconnectedness of the world; pharma companies introduce tiered pricing in order to grow with emerging economies
• Global manufacturing landscape shifts as Chinese labour costs rise; even UK shows a ‘shift to manufacturing’ (and mid-sized companies)
• Airlines (especially low-cost) feel the pinch. BA repositions as ‘service’ airline.
• New legislation will shift the landscape for airlines (carbon trading) and the financial services industries (various legislation to address the crisis).
• Activist shareholders pressure large companies for sell-offs, to release shareholder value that they do not expect to come through dividends
• Defence follows music/retail into cyberspace
• (Add specific items from your own industry here…)
• [For these specific stories and more, click here]

In summary:
The broad picture is one of downturn across all industries. This is exacerbated in some cases by new legislation and by links to volatile financial markets.
Some industries (manufacturing, airlines, defence) are finding their landscape shifting significantly.
For others, shareholders are so pessimistic about the outlook that they are calling for sell-offs as a way to free-up shareholder value.
Some companies, however, have improved performance by innovating.

New Entrants:

• The difficult economic conditions have led to delay of several new listings on stock exchanges
• Tesco has had to delay the launch of its new bank
• New car hire firm will rent cars by the hour
• (Add specific items from your own industry here…)
• [For these specific stories and more, click here]

In summary:
Conditions for new entrants are not easy.

Substitutes:

• In Greece, the barter economy is a growing alternative to the cash economy
• Tesla launches family saloon electric car
• Electric car charging-points rolling out across Britain
• Boeing’s supply chain solution complex to implement, but brings much-needed stability
• New car hire firm will rent cars by the hour, providing another alternative to car ownership
• (Add specific items from your own industry here…)
• [For these specific stories and more, click here]

In summary:
Alternatives, of various sorts, are growing, but are not always having an easy ride.

Overall summary:

The world at the end of 2011 is volatile and interconnected in a way that has not been before.

Across the categories of political, financial, economic, energy-related, and social trends, we see a bifurcation: the shift from a range of possible futures to the emergence of only two extremes as possible ways forward. Broadly we might terms these alternatives as ‘abundance’ and ‘scarcity’. There is currently high volatility between these possibilities and it is impossible to predict the outcome.

In technology, resource constraints mean our existing ways of doing things cannot simply be extrapolated into the future. If we want the future to be better than the past then we need innovation to produce new ‘technologies’ (in the broadest sense, ‘new ways of doing things’). The increasing crisis is creating increased demand for better ways of doing things. Companies that are rising to the challenge are finding success.

Only in environment is the picture unilaterally gloomy. All other categories are offering the potential for ‘better’ or ‘worse’ outcomes. Only under the environmental heading are all indicators pointing to ‘worse’.

The impact on suppliers, customers, industry competition, new entrants and substitutes is a downturn across pretty much all industries. But there are beacons of light.

For individual businesses there are two ways forward from this: either shrink the existing business model, in the hope that things will return to ‘business as usual’, or innovate new business models.

Given the nature and volatility of the forces described above we see no chance of a return to ‘business as usual’. Innovation then is the only way forward, and for those that succeed the rewards will be huge.

The scale of the task may seem daunting, but remember this: how this turns out will be down to the actions taken by all of us. The world is highly volatile (with strong forces pushing in both directions)  and highly connected, which means that a) the outcome is not controllable by any one party and will be the result of all our actions, and b) the actions taken by any one of us could change the entire system.

We shall return to look more closely at innovation in 2012.

Companies grow because they provide meaning and value to the people who choose to engage with them.

The article below argues convincingly that the deepest, richest source of value is the age-old question, “What should I do with my life?”

“Companies … win because they engage the hearts and minds of individuals who are dedicated to answering that life question.

“People thrive by focusing on the question of who they really are — and connecting that to work that they truly love, and in so doing unleashing a productive and creative power that they never imagined.”

http://www.fastcompany.com/magazine/66/mylife.html

Similarly when planning for a business, it is important to be clear about the environment the business will be travelling through.

Michael Porter identified five key aspects of this in 1979, when he published his now-famous ‘five forces’ model:

1) Industry Competition
2) Customers’ bargaining power
3) Suppliers’ bargaining power
4) New Entrants (to the industry)
5) Substitute products/services

Understand these factors, he said, and you understand the key drivers of profitability for any business.

But wider trends also affect profitability: Political, Economic, Social and Technological trends — the ‘PEST’ model.

At permabusiness we like to update these categories to become:

6) Political/Economic
7) Energy/Environmental
Social
9) Technological

Combine these two models (PEEEST and Porter Five Forces) and you have nine key headings that define the ‘environment’ our organisations have to move through.

What do you think are the key drivers under each heading?

We will publish our view before Christmas.