3. Coming to Terms with Impermanence
To fully grasp the leadership paradox at the heart of “Doing All the Right Things” (see above), one must first acknowledge the nature of free market economies. Startling as it may seem, some of the most primary objectives of a business are at odds with the reality of market dynamics. While businesses strive to be sustainable and continuously profitable over time, the markets are fundamentally impermanent. The essential nature of markets is to create and destroy companies. Less than 15% of those companies first listed in the S&P 500 in 1957 remain there today, and only one has outperformed the averages. At this rate of turnover, the average life expectancy in the S&P 500 today is less than 10 years. Statistics alone tell us that maintaining market relevance and a profitable business model over time is fighting against all odds. Impermanence is the rule, but many leaders don’t want to acknowledge that.

4. Keeping Pace with Market Dynamics
The obvious conclusion is that our mental models, our assumptions about the business, must continuously match up against the impermanence of the markets to maintain relevance. Just holding steady is to hope beyond hope against the forces of time. A business model must be consciously evolved by its leaders; it must be challenged, adapted, at times even destroyed by its architects in order to be created anew. If not, then odds are it will be destroyed over time simply by remaining static in the market.

While the initial opportunity for Schwab came through unbundled low cost fees when the SEC outlawed fixed commissions, the real differentiation came from his ability to constantly adapt and evolve the business model utilizing technologies, e.g., back office support to financial planners, TeleBroker trade execution, the OneSource web platform for mutual fund exchange, all of which successfully challenged assumptions about the way consumers invest.

Every business operates on assumptions about the market and how best to compete in that market: what products and services customers will buy, their value, how best to organize people and processes, where to manufacture and distribute products and services, etc. Whether explicitly stated or not – whether even conscious or not – these collective assumptions exist in the minds of business founders and their successors. Collective assumptions congeal into working mental models that shape and guide business decisions. While this is a perfectly natural and highly desirable aspect of human intelligence, we face an increasingly widespread problem: our ability to change deeply rooted mental models is not keeping pace with reality, with the frequency and scale of change in today’s markets.

Markets have always been impermanent. Economist Joseph Schumpeter referred to a process of “creative destruction” as early as 1942.³ However, broad, underlying market forces could go largely unnoticed in the past; historically, they were more gradual, more incremental and (in more than one sense of the word) more manageable.

5. Speed, Complexity and Uncertainty
But it’s not just the speed of change; it’s the pervasiveness and scope of change, the raw unpredictability and disruptiveness of market change today that make these dynamics both more visible and less manageable. As renowned strategist Gary Hamel declared, “Change itself has changed.”⁴

In this real time, web-based, networked, componentized, on demand, out-sourced insourced open-sourced global economy, threats to business models come from every corner of the market, not just from the obvious competitors. Today there is competition for everything, from everywhere, by everyone, all along an industry’s value chain, and maybe from outside an industry as well. In the face of high uncertainty and frequent change, where markets are so complexly interdependent, seemingly insignificant events in remote corners ripple across the markets with sudden, unexpected impact. Change is harder to see, harder to predict, and there is less time to adapt.

6. Inherited Models
When a startup company first enters a market, chances are their basic assumptions have been made explicit for investors to assess. An entrepreneur’s mental models are transparently described as a business model with a clear value proposition and economic logic to be tested in the market. Harsh as it is (high risk, high failure), there is a certain clarity and immediacy to the market feedback process for startups. But for successful companies with sustained history, testing business assumptions in the market can become more clouded, less transparent over time.

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