I was six years old when my grandfather first took me to see the American Steel and Wire plant in Cleveland, Ohio, where he worked for forty-two years as an engineer and then as a supervisor. As a guest, I could only proceed as far as the guard house, but even from that distance the plant terrified me—it was enormous, loud, and smoky. My grandfather held my hand and reassured me that the plant was a safe place, like a fortress. When we went back to his house for lunch, I colored pictures of the mill as a giant castle with cauldrons of molten metal to pour on attackers, defended by an army of burly soldiers clad in steel armor.

In the 1960s, the United States Steel Corporation, which owned the plant where my grandfather worked, appeared an equally unassailable fortress. Founded in 1901 by business magnates, including J. P. Morgan and Andrew Carnegie, U.S. Steel was at its inception the largest industrial corporation in the world, accounting for two-thirds of American raw steel production and one-third of global output.¹ The corporation’s size, market share, balance sheet, asset base, and technology constituted insurmountable barriers. Although its overall share slipped during the twentieth century, U.S. Steel remained one of the pistons driving America’s economic progress. When employees joined U.S. Steel operations in Pittsburgh’s Monongahela Valley in the 1960s, supervisors explained that should a war break out, the Mon Valley was one of three locations the Soviet Union would bomb to cripple the U.S. economy.²

The company was so strong, U.S. Steel executives openly challenged presidential power. Harry Truman tried, but failed, to appropriate the mills to ensure sufficient steel for the Korean War. When John F. Kennedy called for restraint in price increases, U.S. Steel executives initially ignored his request, and then raised prices anyway. The steelmaker only reversed the price hikes after Kennedy attacked U.S. Steel executives in a televised presidential press conference. In 1970, the company built a monument to its success—the U.S. Steel Tower—the highest skyscraper in Pittsburgh, encased in Cor-Ten, a steel alloy designed to weather the elements in perpetuity.

Turbulence roiled the steel industry in the decades that followed. The 1973 OPEC oil shock quadrupled the price of oil and sparked a deep recession, followed by years of stagflation, a brief recession in 1980, and a more severe downturn the following year. Other forces buffeted steelmakers’ profits, including technological shifts, exchange rate volatility, government policy, raw material costs, prices, and changing customer preferences. Each variable was volatile on its own. Mini-mill technology disrupted established production methods; governments imposed and retracted tariffs, changed environmental liabilities, and privatized state-owned mills.³ Customers in the automotive, appliance, and packaging industries substituted plastic and aluminum for steel, and sometimes switched back. Mergers and bankruptcies reconfigured the competitive landscape.

U.S. Steel struggled to adjust. By 1986, the company’s share of domestic shipments had fallen below 15 percent, it had lost money in steel for five consecutive years, and its stock had fallen to its lowest price in over thirty years. Management eliminated one-third of production capacity, diversified into oil and gas, and changed the corporation’s name to USX, but failed to halt the downward slide. Carl Icahn made a hostile takeover bid that triggered further restructuring and ultimately left U.S. Steel a shadow of its former mighty self. In 1979, the company’s steel operations employed 171,654, but the number had fallen to 27,173 a decade later.⁴

As a member of the manufacturing practice with the consulting firm McKinsey & Company, I worked out of an office in the U.S. Steel Building in the mid-1980s. Successive rounds of layoffs left entire floors of the building empty, and many survivors looked exhausted and beaten. The Mon Valley lost nearly fifty thousand steel and related jobs in the 1980s, leaving little for the Soviets to bomb. The decline and fall of the U.S. Steel empire perplexed me. The gales of creative destruction gust through steel like every other industry, but if any company could withstand the storms, surely it was U.S. Steel.

A few years later, I moved to Akron to work at the Uniroyal Goodrich Tire Company. Akron fared no better than Pittsburgh. For nearly sixty years, five tire makers dominated the market, four of them based in Akron. In the span of eighteen months, four of the five tire makers disappeared as independent companies through mergers or acquisitions by foreign competitors. Our largest customers, the Detroit automakers, continued their decades-long slide, like a car crash in slow motion. America’s industrial heartland, once the engine of economic growth, had degenerated into the Rust Belt. In 1992, I entered the doctoral program at Harvard Business School to study why companies failed in turbulent markets. My interest was more personal than academic. I wanted to understand how the industrial heartland of my youth had come to resemble a rusting hulk.

My research uncovered an insidious dynamic. To succeed, managers must commit to a specific mental map of the world, and reinforce it with processes, resources, external relationships, and a culture that support their worldview. With time and success, these commitments harden. When markets shift—and in a turbulent world markets always shift—managers find themselves ensnared in a web of commitments that they themselves have woven. They respond to turbulence by accelerating activities that worked in the past, a dynamic I termed active inertia. Executives saw changes in the market and responded, but hardened commitments channeled their actions into familiar grooves. Active inertia devastated industries beyond manufacturing, contributing to the decline of minicomputer leaders, including Digital, Wang, and Data General, hindering traditional airlines’ response to low-cost carriers and hastening the demise of regional banks.

Active inertia explained a lot, particularly why leading companies such as U.S. Steel or General Motors falter in turbulent markets. But it didn’t explain everything. In particular, the theory did not account for companies such as Toyota or Carnival Cruise Lines, which not only survived but thrived in turbulence. Most of all, active inertia did not explain Mittal Steel. Lakshmi Mittal built his first steel mill in Indonesia in 1976, and within two decades he had created the fourth-largest steel company in the world by acquiring underperforming assets in Mexico, Canada, Trinidad, Germany, Ireland, Kazakhstan, and the United States.⁵ Along the way, Mittal amassed a personal fortune worth $2 billion, securing him a place on Forbes’s list of global billionaires. Having watched market turbulence gut the mighty U.S. Steel, I was perplexed how anyone could parlay a single mill into a global empire in such an unforgiving industry.

Mittal did not owe his success to favorable industry conditions. During the 1990s, steel remained a byword for an unattractive sector trapped in a perpetual downturn. A study of the global steel industry in the 1990s conducted by Boston Consulting Group found that steel companies, on average, destroyed value for their investors and underperformed other basic-materials industries.⁶ Thirteen U.S. producers, including LTV and Wheeling-Pittsburgh, went bankrupt in a single three year span. The BCG report concluded that “capitalism alone cannot solve this problem,” and recommended government intervention to save the global steel industry. Their report did not once mention Mittal.

Mittal succeeded by embracing turbulence, not avoiding it. He made his largest bets in emerging markets characterized by extreme volatility. In 1995, Mittal heard that the government of Kazakhstan planned to sell its biggest steel mill. Many Westerners learned everything they know about this country from the mockumentary Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan, an entertaining albeit unreliable guide to a country larger than Western Europe, which is wedged between Russia and China and sits on large deposits of natural resources. The plant, known as the Karaganda Metallurgical Complex (Karmet), is one of the largest single-site steel mills in the world. When the Soviet Union crumbled, Karmet fell into disrepair, and by 1995, it was operating at less than half capacity. Without paying customers, the factory relied on barter for 80 percent of its sales and printed its own currency to pay employees. With more than thirty thousand workers, the factory was the main employer in the city of Temirtau, whose fortunes fell with the mill’s. Temirtau’s population shrank by 40 percent, and the city suffered from widespread heroin abuse and AIDS. Kazakh prime minister Akezhan Kazhegeldin informed Mittal that any buyer would have to run the city’s orphanage, hospital, trams, schools, and newspaper, as well as the mill.

Mittal did not disregard Kazakhstan’s turbulence. The company’s financial reports catalogued daunting uncertainties, including foreign exchange risk, price fluctuations, inflation, volatile interest rates, a range of possible taxes, an evolving legal system, environmental regulations, and the possibility of nationalization. To top it all off, the operation sat on a geological fault susceptible to earthquakes. Undaunted, Mittal bought the plant within a month of seeing it, also acquiring the local coal and iron mines to supply raw materials. When the power system later collapsed, Mittal bought that as well.

By 2008, Lakshmi Mittal had created the largest steel company in the world, ArcelorMittal, and emerged as the fifth wealthiest person in the world, far ahead of well-known billionaires such as Michael Dell, George Soros, and Michael Bloomberg. The rise of Mittal and the fall of U.S. Steel illustrate the question that motivates this book: how can companies endure and even prosper in turbulence?

For more than a decade, I have sought out the most turbulent markets in the world, and conducted research to isolate what separates winners from losers. My colleagues and I have analyzed matched pairs of more- and less-successful firms within volatile countries—including book-length studies of China and Brazil—and fast-moving industries, including telecommunications, enterprise software, and Europe’s fast fashion industry (see figure 1.1).⁷ These studies revealed a set of practices that characterized successful firms.

These initial findings marked the midpoint, rather than the end of the research.⁸ To test their robustness, I submitted each finding to three additional screens. First, does an insight work in theory? Screening findings against established theory forced me to articulate why something worked, and helped me to separate insights with hard theoretical edges from fluffy notions. Second, does it generalize to other domains? People grapple with turbulence in many domains, including combat, improvisation, new product development, and scientific inquiry. If an analogous conclusion emerged independently in a nonbusiness setting, it increased my confidence that the insight was more general. Finally, do the recommendations work in practice? I tested my initial findings with consulting clients and executives in a one-week “boot-camp” on managing in turbulent markets that I teach at the London Business School. If executives found an idea useful in their own companies, I kept it. If a finding failed any of these three tests, I rejected it.

 

FIGURE 1.1 Selected Research Pairs

 

Emerging markets

China

Industry

Beverages

More Successful

Wahaha

Less Successful

Robust

Emerging markets

China

Industry

Food

More Successful

Ting Hsin

Less Successful

Uni-President

Emerging markets

China

Industry

Appliances

More Successful

Haier

Less Successful

Red Star

Emerging markets

China

Industry

Personal computers

More Successful

Lenovo

Less Successful

Great Wall

Emerging markets

Brazil

Industry

Brewing

More Successful

Brahma

Less Successful

Antarctica

Emerging markets

Brazil

Industry

Brewing

More Successful

Brahma

Less Successful

Antarctica

Emerging markets

Brazil/Europe

Industry

Aerospace

More Successful

Embraer

Less Successful

Fairchild Dornier

Emerging markets

Brazil

Industry

Conglomerate

More Successful

Votorantim

Less Successful

Grupo João Santos

Emerging markets

Brazil

Industry

Banking

More Successful

Banco Itaú

Less Successful

Unibanco

Emerging markets

Middle East

Industry

Banking

More Successful

Garanti Bank

Less Successful

Demirbank

Emerging markets

United States

Industry

Cruising

More Successful

Carnival

Less Successful

Norwegian Caribbean

Emerging markets

United States

Industry

Enterprise software

More Successful

BEA

Less Successful

Novell

Emerging markets

United States

Industry

Tire and rubber

More Successful

Goodyear

Less Successful

Firestone

Emerging markets

United States/Asia

Industry

Automotive

More Successful

Toyota

Less Successful

General Motors

Emerging markets

United States/Europe

Industry

Telecom equipment

More Successful

Nokia

Less Successful

Motorola

Emerging markets

Europe

Industry

Fast fashion

More Successful

Zara

Less Successful

Benetton

Emerging markets

Europe

Industry

Telecommunications

More Successful

Telefónica

Less Successful

Telecom Italia

Emerging markets

Europe

Industry

Airlines

More Successful

easyJet

Less Successful

Go

Emerging markets

Europe

Industry

Banking

More Successful

Banco Santander

Less Successful

Banco Popular

Emerging markets

South Korea

Industry

Conglomerate

More Successful

Samsung

Less Successful

Daewoo

 

TURBULENCE RISING

Daily news reports and analyses hammer us with the message that we live in exceptionally turbulent times. Founded in 1850, Lehman Brothers successfully weathered the Civil War, multiple recessions, four financial panics, two world wars, depressions, oil shocks, and 9/11, but it could not survive the 2008 economic crisis. Systematic research supports the intuition that the world is growing more turbulent for firms. A comprehensive study of equities traded on all major U.S. stock markets found that the volatility in returns of individual stocks more than doubled between the early 1960s and the late 1990s, spiking when the economy entered recession and when stock markets crashed.⁹ Greater volatility at the firm level has not increased aggregate market volatility, because the more violent upward and downward movements of individual shares cancel one another out.

In a series of studies, Professor Diego Comin and his colleagues have documented a sharp increase in firm-level turbulence.¹⁰ The volatility of revenues, profitability, and employment of publicly traded firms in the United States has more than doubled between 1960 and 2000. The spread between corporate bonds and ten-year Treasury notes, another measure of firm-level risk, increased fourfold over the same period. Comin found that global stocks increased in volatility in the late 1990s. He also found that greater turbulence at the firm level translates into instability in wages, particularly since 1980.

Firms struggle to keep pace with shifting markets. The average life expectancy of a firm listed on the S&P Index decreased from ninety years during the 1930s to under twenty-five years by the late 1990s, while the probability that a public firm would disappear in any given ten-year period more than doubled from the 1960s to the 1990s.¹¹ The odds that a high-performing firm would be dethroned from industry leadership tripled between the 1970s and the 1990s.¹² The increase in turbulence is neither uniform across industries nor steady over time, but the broad trend of greater turbulence at the level of the individual firm is clear.¹³

We live in turbulent times, and it is worth pausing to recall how much has changed in a short period. Every year the accounting firm PricewaterhouseCoopers surveys global CEOs.¹⁴ When they began the survey in 1996, fewer than one-third of CEOs regularly logged on to the Internet, and few saw China, Russia, or India as priority markets. The decade that followed, according to PricewaterhouseCoopers, was one of “high-speed change” and “unsettling twists and turns.” It included Enron’s implosion; the popping of the dot-com bubble; the 9/11 terrorist attacks; the Gulf War; a sharp jump in commodity prices; the rise of the so-called BRIC economies of Brazil, Russia, India, and China; and the growing salience of environmental concerns.

All of these changes preceded the 2008 credit crunch and global recession that followed. Turbulence, as I will use the term throughout the book, refers to rapid and unpredictable changes in the environment that influence a firm’s ability to create value.¹⁵ Many commentators equate turbulence with the current downturn, but this is shortsighted. Multiple measures, including stock returns, firm mortality, profitability, technology diffusion, and raw material prices, all point to the same conclusion—the global economy has grown more turbulent in the past few decades. The rise in turbulence may not be uniform over time or hit all industries or countries with equal force, but the general trend is clear. Moreover, the three factors that drive turbulence—dynamism, complexity, and competition—are likely to amplify volatility in the future. Turbulence did not begin with the current downturn, nor are we likely to return to a predictable world after the recession ends.

Dynamism describes the frequency and magnitude of change in an individual variable that influence a firm’s ability to create value. Complexity refers to the number of and interactions among forces that influence value creation. Competition extends beyond product markets to include clashes over scarce resources such as capital, distribution partners, and talented employees. All three drivers of turbulence have increased in recent decades.

Dynamism is the change in individual variables. The range of relevant factors precludes an analysis of each, but some critical economic variables have grown more volatile in recent decades. Since the Bretton Woods system of fixed exchange rates collapsed in 1971, currencies have fluctuated more wildly against one another. The most extreme fluctuation is a currency crisis, defined as a large and abrupt depreciation in a country’s currency often followed by economic upheaval and a drop in output. A few large currency crises—such as the “Asian contagion” that spread from Thailand in 1997 and the Russian “Ruble crisis” a year later—make the headlines, but smaller crises have become common in recent decades, with nearly 250 between 1978 and 2003.¹⁶ Prices for a wide range of commodities have also displayed greater volatility in recent decades.¹⁷

People often assume that changes occur in a linear fashion. Indeed, some trends, such as aging populations in developed countries, follow a predictable straight line. Many variables, however, are prone to nonlinear shifts: home prices fall off a cliff, commodities spike, consumer acceptance hits a tipping point. The psychological effect of changes can magnify their influence out of proportion to their actual impact. Five years after the 9/11 terrorist attacks, one-third of Americans reported that they worried they might personally experience a terrorist attack.¹⁸ Statistically, however, they were one thousand times more likely to die from complications related to obesity.¹⁹

Complexity, the second source of turbulence, describes the number of variables that influence a firm’s ability to create value, as well as possible interactions among these factors. As firms become more interconnected with the global economy, they increase their exposure to unanticipated changes from multiple directions. Even a business as uncomplicated as microbrewing faces complexity. In 2007, the price of barley nearly doubled when U.S. farmers shifted to planting corn in response to government subsidies for corn-based ethanol. These regulations, in turn, were motivated by politicians’ anxiety about increasing oil prices and supply disruptions.²⁰ The scarcity of barley coincided with poor weather in Europe that limited yields of hops, just as the dollar was falling against the euro. It’s hard to imagine a simpler business, yet the profits of U.S. microbrewers were influenced by a wide range of global forces, ranging from European weather to oil prices, that were beyond their ability to predict or control.

Greater integration of the global economy intertwines the fates of companies with far-flung economies and exposes them to a much wider range of possible changes, many arising outside their line of sight. The integration of formerly communist countries into the global market economy is a dramatic example, but it is part of a bigger trend toward closer integration in markets for raw materials, finished goods and services, capital, and labor.²¹ Capital markets have grown 60 percent more integrated, relative to the fragmentation into local stock and credit markets at the end of World War II. Integration broadens sources of funding but also spreads economic crises more widely, infecting economies around the world. When subprime borrowers in America sneezed, the world caught cold. New technologies also diffuse more quickly. Technological breakthroughs discovered between 1750 and 1900 took an average of 119 years to diffuse globally.²² By the first half of the 1900s, they disseminated in half that time. Inventions discovered after 1975 required only sixteen years to spread globally. A retreat from globalization in the future, were such a retrenchment to take place, would not eliminate complexity; it would shift its sources from international markets to the vagaries of government policy. The free flow of information through the Internet would be nearly impossible to reverse.

Contextual variables, such as exchange rates or geopolitics, resemble forces of nature. They influence performance, defy prediction or control, and remain indifferent to the fate of individual firms. Competitors, in contrast, go out of their way to discover and exploit their rivals’ weaknesses. The rise of emerging market champions such as Mittal has intensified competition in recent decades. Companies from emerging markets now lead a wide range of global industries, including brewing (Anheuser-Busch InBev, SABMiller), consumer electronics (Samsung), and information services (Infosys, Tata Consultancy Services, Wipro).

Many people dismiss emerging market competitors as a transient threat, like the rise of Japan Inc., which terrified Western managers throughout the 1980s, before receding into the background. The comparison to Japan Inc. is comforting but misleading. Japan’s Ministry of International Trade and Industry coordinated the expansion, targeted a few sectors, and encouraged similar companies to expand globally. The Japanese competitors rose as a group, and largely fell as a group, with a few exceptions such as Toyota. The defining characteristic of emerging market competitors, in contrast, is their heterogeneity—in country of origin, business model, industry, and strategy. Some of their individual experiments are bound to fail, but the diversity of approach increases the odds that others will succeed.

The turbulence of China, India, and Brazil overwhelms most start-ups from these countries. Emerging market firms face low-cost domestic rivals and well-funded multinationals. They must satisfy discerning customers with limited disposable income, while coping with extreme levels of regulatory and macroeconomic turbulence. Emerging markets constitute a harsh selection environment that weeds out most start-ups. The hardy firms that survive, however, emerge as fierce competitors which excel in turbulent markets and look abroad for growth opportunities. Global expansion allows emerging market champions to tap new markets, diversify risk geographically, build economies of scale, and engage in multipoint competition with multinationals. A recent survey found that two-thirds of the CEOs of fast-growing companies, most from emerging markets, intended to expand globally rather than focus exclusively on their domestic market.²³

The rise of venture capital has also increased competitive intensity. Venture capitalists make early investments that allow start-up firms to explore potential opportunities and scale quickly. Venture capitalists have funded firms such as Google, Microsoft, Intel, Genentech, Apple, Cisco, Starbucks, Home Depot, Staples, eBay, and Medtronix that have disrupted old industries and created new ones. These household names represent a tiny fraction of all companies that raised venture capital funding. Between 1980 and 2006, U.S. venture capitalists invested in more than twenty-three thousand start-ups. Not all have been home runs, but many have created value. Nearly one-third of venture-backed firms have gone public or been sold to a larger competitor.²⁴ The proliferation of venture-backed firms intensifies competition for incumbent players.

RISKY BUSINESS

Turbulence, for many, equals risk, and risk equals bad news. In 1999, the London Business School hosted a case competition in which students analyzed the Mittal case study. Lakshmi Mittal judged the entries. The students identified a long list of risks facing the company and unanimously advised Mittal to take chips off the table while he was ahead, diversifying into other industries or selling his steel business altogether. Their presentations echoed discussions I had with U.S. Steel executives, who viewed every change in the steel industry as a threat—globalization meant low-price imports, while technological innovation disrupted their established processes.

A focus on the downside of turbulence extends beyond steel. In 2007, the World Economic Forum ranked contingencies by their potential impact on the global economy.²⁵ These included man-made threats such as asset price collapse, retrenchment from globalization, civil wars, oil price shocks, a hard economic landing in China, instability in the Middle East, transnational crime, a fall in the U.S. dollar, failed and failing states, proliferation of weapons of mass destruction, and international terrorism, rounded off with natural disasters reminiscent of biblical plagues, including chronic disease, tropical storms, earthquakes, inland flooding, and loss of freshwater. Although the authors conceded that one man’s risk may be another’s opportunity, only a single item on their list—nanotechnology—lent itself to a positive spin. In 2007, the Wall Street Journal commissioned a survey of more than twenty-one thousand people from twenty countries and found respondents anxious about threats lurking in the future. The paper summarized its findings in the title: “The Age of Fear.”²⁶

Framing events as a threat helps to mobilize the resources required for an aggressive response. In an excellent study of newspapers’ reaction to the Internet, Professor Clark Gilbert found that most newspaper executives ignored the Internet until the late 1990s.²⁷ When they finally took notice, they framed the new technology not as a way to engage in an ongoing discussion with their readers but as a threat to existing advertising and subscription revenues. Most newspapers then embarked on crash-course efforts to build an online presence to counter the threat. Despite mounting losses in their online businesses, print executives doubled investments annually, hurling money, people, and attention at the new business in an effort to protect their current profits.

Framing change in negative terms gives rise to a response known as “threat rigidity,” that entails a contraction of authority, reduced experimentation, and focus on existing resources.²⁸ Gilbert’s study documented all three dysfunctions of threat rigidity. In the newspapers he studied, top executives called the shots in the online businesses, in contrast to their bottom-up management in other units. Senior executives dictated templates for sales, business models, and product development that limited their subordinates’ room to experiment. The rapid influx of resources, moreover, prevented newspapers from experimenting on a small scale before growing the business. They expanded the online businesses before working out the kinks. Finally, the newspapers replicated existing resources online. More than 85 percent of the newspapers’ Web content rehashed articles from the paper, while ignoring features that were not part of their traditional print offering, including social networking, online auctions, or breaking news from third parties.

Turbulence produces not only risks but also opportunities, and fixating on threats obscures the upside of turbulence. A recent study found that nearly half of large companies surveyed had a chief risk officer, but how many employ a chief opportunity officer? If anyone could recognize the Karmet opportunity, it should have been U.S. Steel executives, with nearly a century of experience running large plants and dealing with local communities. Indeed, the Kazakh government invited a team from U.S. Steel to turn the plant around. Despite their expertise, the U.S. Steel team saw only risks, missed the opportunity, and passed on the acquisition. Mittal, in contrast, saw opportunities everywhere. “Emerged, emerging or submerging markets,” he said, “they all represent opportunity to me.”²⁹

Of course, the world faces real challenges, but framing them as threats is not necessarily the best way to address them. In his 1968 book The Population Bomb, Stanford professor Paul Ehrlich analyzed the growing population, political unrest, and famine embroiling the Indian subcontinent and predicted that “the battle to feed all of humanity is over. In the 1970s the world will undergo famines—hundreds of millions of people are going to starve to death in spite of any crash programs embarked upon now.”³⁰ Ehrlich dismissed as “fantasy” the possibility that India could avoid widespread starvation and conflict over food. Peering into turbulence, he saw only famine and war.

While Ehrlich foresaw doom, the plant geneticist Norman Borlaug glimpsed an opportunity to breed high-yield disease-resistant wheat. His strain helped India and Pakistan to double wheat production between 1965 and 1970, become self-sufficient in food, and avoid widespread starvation. Borlaug won the Nobel Peace Prize, while Ehrlich removed his prediction from later editions of his book.

THE UPSIDE OF TURBULENCE

An uncertain future cloaks unseen risks but also holds unanticipated opportunities. Turbulent markets create opportunities in three distinct ways: turbulence introduces new resources into the economy, enables innovative combinations of existing resources, and stimulates novel consumer demand. Opportunities resemble the creation of a new dish in cooking, which arises from a new ingredient, an innovative recipe for combining familiar ingredients, or a shift in tastes.

Opportunities from new ingredients. In the sixteenth century, European explorers discovered unimagined ingredients in the New World, including the tomato. Italians initially thought tomatoes poisonous and used them only as decorative plants. Eventually, Neapolitan chefs experimented with the new fruit, which thereafter became a staple of Italian cuisine. This new resource enabled previously inconceivable sauces, including puttanesca, Bolognese, and marinara.³¹

The business analogue occurs when new resources enter the market. Resources include both hard assets (oil reserves or real estate, for example) and intangible assets (brand, technology, or expertise). Throughout the 1990s, politicians privatized money-losing mills, and the percentage of global steel production controlled by governments decreased from 70 percent to 30 percent, flooding the market with previously unavailable “ingredients.” Mittal spotted the opportunity to build an empire from unwanted assets, and negotiated low prices for the steel mills. The government of Trinidad spent $500 million to build a plant that it sold to Mittal seven years later for $70 million, while the Mexican government invested more than $2 billion on a plant that it offloaded for $220 million less than a decade later.

Newly privatized plants were not the only resource that created opportunity for Mittal. In Trinidad, the government was paying $20 million a year for a team of sixty German technicians to manage the factory. Mittal replaced the consultants with Indian managers and technical experts who earned one-tenth what the European advisors made. Mittal was among the first executives to tap emerging markets for labor. He recruited Indian managers frustrated by the dearth of opportunities at home and placed them in his newly acquired mills.

Opportunities from novel combinations of resources. A new dish can emerge by combining existing ingredients in an original way. Consider the humble sandwich, named after John Montagu, the fourth Earl of Sandwich.³² An inveterate gambler, Montagu ordered salted beef placed between two pieces of toasted bread so he could dine without interrupting his gambling. Bread and meat had existed for millennia, as had gambling, but Montagu combined familiar ingredients in a new way to fulfill a long-standing desire for fast food.

Novel combinations of existing resources played a supporting role in the Mittal story. Mittal’s first plant in Indonesia included a novel arrangement of two existing technologies. The first was an electric arc furnace, which produces steel by melting scrap metal rather than by smelting iron ore, coke, and limestone in a traditional furnace. Fearing a disruption to his supply of cheap scrap, Mittal adopted a second technology known as direct reduced iron, which transformed iron ore powder into metallic pellets—a substitute for scrap metal. In 1976, Mittal broke ground amidst rice paddies to build what he dubbed “an integrated mini-mill,” combining the iron pellet technology with an electric arc furnace to produce low-cost steel bars for Indonesia’s booming construction market. The constituent technologies had been around for decades, but Mittal pioneered their combination. Mittal later deviated from the integrated mini-mill and acquired plants employing traditional steel-making technologies.

Opportunities arising from novel combinations are linked to innovation, whose breathless fans have stretched the term so widely that it can cover anything new or good. A tight definition of innovation, however, consists of a novel combination of existing resources, in the spirit of the sandwich. Innovations come in many flavors—they can reconfigure a technology, process, supply chain or business model; sustain or disrupt an existing trajectory; extend existing practices; or break with the past. But all are examples of novelty from recombining existing resources. As the Mittal example illustrates, innovation is not the only, or even most important, way to create value in a turbulent world. Later in the book, I will argue that the singleminded focus on innovation so common in management over the past decade is not only misplaced but often dangerous to the extent that it distracts people from other ways to create value in turbulent markets.

Opportunities from shifting tastes. Opportunities also arise when consumer preferences shift, much as a change in diners’ tastes creates demand for new dishes. In 1963, Robert Atkins, a New York cardiologist, read an article in the Journal of the American Medical Association describing a low-carbohydrate diet, and adopted a modified version of the weight-loss plan hoping to lose three pounds in a month.³³ After Atkins lost twenty pounds, he abandoned his cardiology practice and founded an obesity clinic. Within five years, Atkins’s diet achieved wide publicity, earning him guest appearances on The Tonight Show and inclusion of his diet in Vogue magazine.³⁴ Although the low-carbohydrate diet is controversial (a 2003 issue of the Harvard Health Letter dubbed it “the bad boy of diets”), it attracted an estimated thirty million Americans to give it a try. The popularity of the Atkins diet created an opportunity for hundreds of new low-carbohydrate meals, including the oxymoronic low-carbohydrate pasta, which would have found a limited market had Atkins not shifted tastes.

Changing tastes also played a critical role in Mittal’s success. He could have purchased the plants for a dime on the dollar, staffed them with talented managers, improved operations, and still gone bankrupt if no one bought his steel. His early experience in Indonesia, however, alerted Mittal to the pent-up demand for steel in emerging markets. Mittal noticed a hunger for steel that arose as market reforms increased disposable income for hundreds of millions of consumers, spurring demand for more houses to live in, cars to drive, and roads to congest.

The rising middle class in emerging markets is not the only change in tastes that creates opportunity. An aging population drives demand for drugs to alleviate the discomforts of old age, investment products to ensure a comfortable retirement, and concerts with classic rockers strutting across the stage despite being old enough to collect social security. Growing concern about environmental sustainability stimulates demand for fuel-efficient cars, alternative technologies, and packaging made from recycled materials. These shifts create new consumer tastes, which, like the Atkins diet, generate new opportunities.

THE PUNCH LINE

This book makes three central arguments. First, turbulence is a fundamental feature of markets characterized by dynamism, complexity, and intense competition. Many people lurch from one “black swan” to the next—from the dot-com boom to Enron’s implosion to 9/11 to the global downturn—viewing each as a one-off exception to the stability they crave. Unexpected changes are not bugs in the world’s operating system; they are a feature. This book is written, in part, to raise readers’ sights from the current crisis to the big picture of a world in a constant state of flux.

My second thesis is that turbulence, despite its obvious risks, has an upside. Contextual forces churn ceaselessly, introducing new ingredients, changing tastes, and enabling novel combinations that create opportunities. Most people fixate so heavily on the downside of turbulence—the risks, uncertainty, and threats—that they, like the U.S. Steel executives, ignore golden opportunities right in front of them. Seeing a turbulent world through threat-tinted glasses invites the dysfunctions of threat rigidity—centralized control, limited experimentation, and focus on existing resources—that stymies the pursuit of opportunity.

The third thesis is that individuals can take practical steps to seize the upside of turbulence. In the past few years, a series of books including The Age of Turbulence by Alan Greenspan and The Black Swan by Nassim Nicholas Taleb have built a compelling case that the world is turbulent, but left readers with little practical guidance on what they can do. This book picks up where they leave off. Many people assume that entrepreneurs such as Bill Gates and Howard Schultz who thrive in turbulence differ from the rest of us, possessing some genetic endowment that predestines them to succeed where others stumble. After decades of research, however, scholars have failed to find any meaningful link between personality traits and success in pursuing opportunities.³⁵

I taught entrepreneurship at Harvard Business School during the dot-com boom and bust. The greatest lesson I learned from studying and working with dozens of successful and failed companies in those heady days was this: entrepreneurs and managers succeed not because of who they are but because of what they do. I have studied how dozens of corporate Davids, such as Lakshmi Mittal, have taken on industry Goliaths. In each case the smooth stone in their slingshot was their ability to see and seize opportunities that arise out of turbulent markets. The skills to do so, I believe, can be mastered by anyone.