Impact Series, part 4: In search of the new equilibrium
Updated: Mar 28, 2022
In part 3 of this series, I talked about how the world has come to a turning point, with two important insights: waiting to transform is really not an option anymore and we have to accept that the world will never be the same as before. I further elaborate this last statement here.
The turning point, part 2
The world is at a turning point. I've been in the digital business myself for almost 3 decades and I have heard countless predictions that the world was about to fundamentally change. The bigger the prophecy of doom, the more likely that little or nothing changed at all. After all, change happens more slowly than we often realize. This, of course, gave critics the ammunition they needed to ridicule predictions and deny possible transformation.
My personal experience has shown that a truly radical technological change takes about 20 years. The first ten years are needed to get the technology fully up to speed and to deliver on its promises. The second ten years are needed to get adoption up to speed. You can apply this simple rule to all the major digital revolutions we have seen in recent years. From Amazon to Uber, from smartphone adoption to social media, from streaming to electric vehicles.
No matter how you spin it, no matter how much it may have been laughed at, all the revolutions I mention above actually happened. And they've completely turned entire sectors upside down. If you look at it, the twenty years it has taken on average to transform an industry at its core is extremely short compared to the long time those industries have stayed the same.
And now we have arrived at one of the biggest turning points in recent history, based on a perfect storm of dominant forces. On the one hand, Covid has radically accelerated the technology revolution in just a few years. On the other hand, there is a growing realization that both society and our economy will have to embrace fundamentally new models to be ready for the next 75 years.
The traditional definition of The Equilibrium comes from classical economics. It is defined as a stage of balance in the market between supply and demand. If a given supply at a given price, is in balance with a demand and a willingness to pay that price, then the Equilibrium has been reached. The Equilibrium can be disturbed if, for example, there is too much supply, or the market is no longer willing to pay the requested price. In that case, we speak of The Disequilibrium. In those cases, spontaneous market mechanisms will ensure that the situation recovers by adjusting prices or changing availability.
What if we would expand this model? What if there is also a societal equilibrium? What would this mean? Has it been disrupted today, and if so, what could be the New Equilibrium?
The Societal Equilibrium
For the past 75 years, the world appeared relatively stable. People born after World War II can barely relate to the world before, where life looked completely different.
One domain that seems unchanged is our consumption and the proportion in which we spend our money on, for example, food, clothing, health, leisure, housing, or mobility. There was a time - not so long ago - when virtually all our money went to food, with nothing left for anything else. That situation has completely changed over the past few decades: we barely pay for our food anymore and instead spend a small fortune on housing, smartphones, internet and streaming subscriptions, entertainment, travel, and so on.
Other domains that have remained seemingly unchanged are our access to education, access to healthcare, the state of our democracy, equal rights for all, and so on.
And, of course, there is that one skill that we completely lost over time: the ability to cope with System-Shocks. In the past 75 years, we barely had to deal with major instability, such as natural disasters, wars, revolutions, or pandemics. Until now.
For each of these major domains, a balance naturally emerged. Most people today have to a certain degree access to most things they aspire to: food, education, health, leisure, mobility, … Although there are huge differences between the richest and the poorest people in our (Western) society, most people benefit from the economical and societal framework they are offered and are an intrinsic part of. This system is far from perfect, but good enough to stay in balance. Let's call this the Societal Equilibrium.
The Great Disequilibrium
It is our conviction that the old equilibrium is currently getting disrupted to such an extent that we must look for new rules of the game, for both our society and our economy. We have entered a stage of disequilibrium.
These new rules are dictated by the challenges we face, and the costs associated with them. Although we have seen this coming for a long time, the Covid crisis, combined with the growing understanding of the consequences of climate change, has accelerated awareness of this New Equilibrium over the past 2 years.
One of the major disruptors to the current equilibrium is financial in nature. Two phenomena that will confront us with unprecedented costs in the coming years are Covid on the one hand and the costs of climate change on the other. The costs for Covid (both relief measures and economic impact) are already estimated at tens of trillions of euros. Estimates of the costs of climate change vary but will probably surpass any crisis in history. Recently, McKinsey estimated the potential annual cost at $10 trillion.
Another cause of disruption is a change in our behavior: because of Covid, mixed with a change in mentality among the younger generations, people's priorities seem to be shifting. Although many people like to go back to the "old normal," there are lasting changes in the way we live, work, move, consume, and so on.
Many predict that this decade will be a reliving of the "roaring twenties." I, on the other hand, am convinced that it will be the time of the Great Disequilibrium.
The New Equilibrium
In my book, "The World is Round," I argue that even in the light of our current challenges and uncertainties, we can still craft an optimistic plan for the future. And even though Covid and the climate crisis are now painfully confronting us, I remain convinced that tomorrow can be better than today, if we want it to.
First, we need to realize that we are entering a perfect storm that will affect all the rules of the game around investments, costs, expenses, priorities, products, and their replacement cycles,... The Great Disequilibrium.
The obvious accessibility of the things we take so much for granted in the West is in jeopardy: cheap food, fast fashion, affordable housing, every family one or more cars, cheap flying, multiple vacations a year, a new smartphone every 24 months, and so on. Each of these seeming achievements is under pressure from impending climate action, regulatory constraints, and massive financial pressures on our society and economy.
The challenge will be to reinvent everything we know, so we create a favorable long-term equilibrium. Possibly this will look different from what we are used to. But if we are smart about it, if we continue to focus on impactful innovations, we should be able to create an optimistic master plan for the next 75 years.
A few examples illustrate what the New Equilibrium could look like. Whether it will become reality remains to be seen.
Traveling in the New Equilibrium.
One of the consequences of Covid is that corporates have discovered the redundancy of business travel. It is expected that the number of business trips will never reach pre-Covid levels again. This will drive up the cost of flying, especially for private travelers, whose cheap tickets are co-financed by business travel. If, in addition, sustainability costs are passed on to tickets, prices will rise even further. The old Equilibrium in which everyone could fly cheaply on a regular basis will be a thing of the past. In the New Equilibrium, other forms of travel will become necessary: closer to home, slower, with new means of transport such as the train (although, new?). Perhaps we will exchange the 5 city trips and ski trips per year for one (expensive) flight to a destination where we will stay for weeks (now that remote working is a thing)
Housing in the New Equilibrium
Climate targets are driving housing budgets and costs through the roof: new building standards and the need to renovate existing properties are driving up costs. No doubt in the coming years we can expect higher insurance premiums for homes that may be subject to climate disasters such as floods or wildfires. In addition, insurance will not cover all the costs we face. As a result of more expensive housing, the old equilibrium where most people had easy access to buying or renting a home is being shattered, and we must look for a New Equilibrium to meet these challenges. This could be in the form of a combination of new building methods (e.g. modular), smaller homes in new housing formulas (e.g. cooperative models), sharing of infrastructure, and so on.
Fast Fashion and consumption in the New Equilibrium
We live in a world where "fast fashion" and other forms of fast consumption, are the norm. Cheap products made in Southeast Asia are released into the marketplace and consumed with high frequency. Real costs, which also consider climate impact and other sustainability requirements, are often not factored into the Old Equilibrium. Under the pressure from climate objectives, this will soon change: we can expect sustainability taxes to be levied at Europe's external borders, on all imports from these regions. This will naturally push prices up. In addition, the "just-in-time" global supply chain is also under pressure, which encourages the local production of goods. In the New Equilibrium, we will have to consider more expensive (local) products, which will make us less likely to replace them. This will increase the demand for more durable products that last longer, resulting in the demise of fast fashion and fast consumption as we know it today.
Impact Transformation as a way to prepare for the New Equilibrium
The three scenarios I have described above indicate how the world stands to change in the near future. You can easily imagine similar scenarios for food, energy, mobility, education, healthcare, product ownership, and all other economic and social domains.
This imminent disruption of the status quo creates enormous challenges for companies to deal with. One approach is Impact Transformation. In short, this boils down to:
seeing the broad technological and societal changes and understanding their impact on the status quo
creating a vision of tomorrow's world, according to the New Equilibrium
choosing one's own strategic position in that future: who do we want to be or can we be
defining objectives that are impactful, with financial, social, and environmental gains as a basis
defining a roadmap or playbook to initiate the changes and get started
Companies must realize that all the challenges described above also offer opportunities. A world in which we sell fewer, but more expensive products can also guarantee revenues and profits. A world with more local high-tech production creates economic opportunities and employment. Those who crack the code of the New Equilibrium will grow and prosper in that new world. Those who remain stagnant will disappear.
In the 5th and final part of this series, I will explore the meaning and importance of Impact Transformation.
Would you like to chat about the ideas? Contact us and we will make an appointment for a real or virtual coffee.
If you have a transformation challenge and you are looking for a vision for your company in the New Equilibrium, don't hesitate to contact us as well. We might be able to help you.