A restaurant I used to go to in Cape Town was once a social hotspot. You could rock up there on any given night, and you’d be guaranteed to find it packed, and to find someone you knew amongst the throngs of people at the tables or around the bar.
A few years later, things started to look shabby: the tables, chairs, carpets, and curtains. A few years after that, the food quality dropped, and empty tables became the norm. And a few years later, it was gone.
Entropy is ‘the decline toward disorder’, which is a technical way to describe the gradual slide an institution experiences over time – slow and subtle, but significant.
Every business is subject to Entropy. It comes with the territory, so this isn’t a question about avoiding entropy as much as it’s one about ‘treating’ entropy.
As I’ve written about before, businesses have a way of absorbing pain. It’s something about the toughness of business that leads to this: business isn’t for the faint of heart, and I suppose people, teams, and cultures are hard-wired to just get on with it and not complain, raise the alarm, or insist on something better.
But that’s not the point of this article. The point is ‘How does a CEO detect and circuit-break the entropy in their business?’
There are a few answers to this, but I’d like to highlight one dimension of this complex problem: the role of Upstream impact on Downstream results.
All businesses focus heavily on Downstream results, largely because they are reported. But the Upstream conditions receive less attention because they are less visible and, in some instances, invisible.
Think of business performance as a river system.
- Downstream: Revenue, profit, ROE, valuation
- Midstream: Strategy execution, operational performance
- Upstream: The invisible conditions that determine whether the system works
Most leadership teams manage Downstream and Midstream.
Very few manage Upstream.
Below are the Upstream conditions that consistently determine whether a business thrives or struggles.
1. The Narrative (The ‘story’ of the business)
This is the interpretive frame through which leaders see the business.
2. Leadership Quality (The consciousness of the Leader)
The CEO is the largest causal force in the system.
3. Trust in the system
Trust determines speed and energy.
4. The quality of human energy
This is the variable business almost never measures.
5. Strategic coherence
Many businesses do not fail because they lack strategy – it’s because their strategy is incoherent.
6. System design
Businesses are systems, and structure determines behaviour.
There is a massive blind spot in CEOship about the presence of these powerful forces. The Downstream stuff gets all the attention, but it’s the Upstream stuff that determines the Downstream quality. This often places businesses in a position of ‘active inertia’: trying harder and harder, for less and less return.
The Upstream forces in a business aren’t written about much, so they are hard for CEOs to understand, let alone act on.
There’s no quick fix: these are complex topics that simply need to be learned, understood, and implemented. For motivated CEOs, this can take place, but for the apathetic CEO, they will continue to be plagued by these invisible forces.
I read a quote earlier today that ‘CEOs have never been more incompetent’.
I know better than to alienate my reader base by saying challenging things like this, but the fact is that it’s true. The CEO role is broad and complex, and this is one area that you’ll likely require external expertise to teach you. There’s no shame in that – it gets you up the learning curve quickly and efficiently.
Keep your eyes open for the quality of these six factors. The success of your business and your career depends on them.