Preface

My friends, before we embark on this intellectual expedition across millennia and continents, allow me, as your old friend, to pose a question that may be somewhat counterintuitive: Is history truly created by the grand strategies of a few heroes, or is it determined by some deeper, more powerful, cyclical forces, like the changing of the seasons?

For a long time, we have been accustomed to reading history from the perspective of the “Great Man theory.” We are thrilled by the expeditions of Alexander, the conquests of Caesar, and the rise of Napoleon; we memorize the founding monarchs and last emperors of every dynasty, attributing the rise and fall of civilizations to their wisdom or folly. This is undoubtedly a fascinating narrative method, simplifying complex history into a series of heroic epics filled with personal charisma and dramatic conflict.

However, as a financial veteran who has grappled with risks and cycles for over thirty years, my professional instinct makes me deeply skeptical of this narrative. Among the tens of thousands of companies I have reviewed, I have seen too many “star entrepreneurs,” once basking in glory, whose genius and efforts proved so fragile in the face of industry headwinds. I have also seen some seemingly mediocre “stewards” who, simply by keeping in step with the expansionary rhythm of the times, were easily pushed to the crest of the wave of wealth.

This has forced me to ponder a more fundamental question: beneath the visible decisions and actions of heroic figures, does there exist an unseen, underlying “mechanical script” that governs everything, much like the law of gravity?

This book is born to answer this question. We will temporarily set aside moral judgments on the merits of heroes and break free from the confines of the “Great Man theory” to conduct a bolder, more ambitious thought experiment. We will no longer be content to describe “what happened” in history, but will, like a physicist, attempt to discover and explain “why it happened this way.”

To this end, I will, for the first time, systematically apply the core intellectual tool that I have used throughout my entire professional career to penetrate the fog of business and perceive the pulse of cycles, to the interpretation of this grander drama of the rise and fall of great world powers. This tool is the core of our “Hardcore Banker’s Theory” intellectual system—the “Four Forces Compass.”

We will attempt to argue that the rise and fall of a nation or a civilization is likewise determined by the interplay, the waxing and waning, of four fundamental underlying forces, originating from human nature and the laws of social evolution.

The Expansionary Force, originating from hope and ambition, drives civilizations to open up new territories and create wealth.

The Contractionary Force, originating from fear and conservatism, leads to imperial overstretch and internal fragmentation.

The Equilibrium Force, originating from the collective demand for order and stability, maintains the survival of the community by constructing laws, institutions, and public works.

And the rarest and most precious Evolutionary Force, which, through technological revolutions, intellectual enlightenments, and institutional innovations, leads civilizations to traverse cycles of death and achieve paradigm shifts.

Holding this compass, we will navigate anew the long river of real history. We will see that the glory of the Roman Empire lay not only in the strength of its legions (Expansionary Force), but also in the unparalleled “Equilibrium Force” constructed by its laws and road engineering; and its final collapse was due to the absence of “Evolutionary Force,” leading the powerful “Contractionary Force” to ultimately overwhelm everything. We will see that the rise of the British Empire was a perfect resonance of “Evolutionary Force” (the Industrial Revolution) and “Expansionary Force” (global trade); while the dissolution of the Soviet Union was the complete strangulation of the other three forces by its rigid “Equilibrium Force” (central planning).

Finally, we will calibrate this compass to the turbulent present in which we live, to deeply analyze the internal “Four Forces” structure of the two core “players” of our time—the incumbent power, the United States, and the challenger, China—as well as the grand power game concerning the future world order that is unfolding between them.

I promise, this will not be a dry academic treatise. I will continue in the capacity of a “financial veteran,” using the unique perspective with which I examine the rise and fall of enterprises—a perspective that focuses on cash flow, pays attention to the balance sheet, and has insight into human nature—to dissect the “financial health” and “organizational vitality” of one great civilization after another. I will use the most vivid stories and the most hardcore logic to provide you with a brand-new “intellectual compass,” one that can penetrate the layers of historical fog and ultimately perceive the essence of the current global changes.

Friends, history is never the dust of the past; it is the one and only guide to the future. Only by understanding the path we have traveled can we better walk the path that lies ahead. Now, let us calibrate our compass and begin this journey of exploration across millennia and continents, to find the eternal engine that drives history.

Part One: The Compass of Civilization: The Four Fundamental Forces Driving History

Friends, in the intellectual exploration we have completed together before, we, like geologists, delved beneath the crust of the business world and successfully mapped out an underlying “mechanical blueprint” that drives organizational evolution. We identified the four fundamental forces that originate from human nature and have shaped all forms of collaboration from primitive tribes to modern corporations: the Expansionary Force, the Contractionary Force, the Equilibrium Force, and the Evolutionary Force. That was a journey from the micro to the meso level, where we saw clearly the internal game of organizations.

Now, we will undertake a “dimensional ascension” of grander significance. We will take this newly forged “Four Forces Compass,” used for examining organizations, from the corporate boardroom to the vaster, more magnificent sky of history. We will attempt to use it to remeasure the most massive, most complex, and most awe-inspiring ultimate organizational forms in human history—nations and civilizations.

The core task of this part is to complete this “calibration of the compass.” We will redefine and expand the profound connotations of these four fundamental forces on the scale of nations and civilizations. We will see how a nation’s “Expansionary Force” is manifested in its geopolitical, demographic, and cultural impulses; how the “Contractionary Force” is expressed as the price of overexpansion, the fragmentation of internal society, and the entropy of civilization; how the “Equilibrium Force” maintains the existence of a vast community through institutions, finance, and currency; and how the ultimate “Evolutionary Force,” through the self-renewal of technology, culture, and institutions, determines whether a civilization can traverse cycles and achieve immortality.

This part is the theoretical cornerstone of the entire book, the “universal grammar” we will use to reinterpret the history of the rise and fall of great world powers. By mastering this grammar, we will no longer be passive bystanders of history, but clear-eyed analysts who can perceive the driving logic behind it. Now, let us together, calibrate the scale for this compass of civilization.

Chapter 1: The “Four Forces Model” of an Organization: An Internal History of Game Theory

In my completed work, The Evolution of Organizations, I systematically reduced the social phenomenon of the “organization” to a dynamic “mechanical system” where four underlying forces—the Expansionary Force, the Contractionary Force, the Equilibrium Force, and the Evolutionary Force—are in a constant state of interplay, waxing and waning. That exploration was the logical starting point of my entire intellectual system.

This chapter will briefly return to that starting point, but this time, the purpose is not to repeat past arguments, but to perform a critical “energy calibration” and “interface pre-embedding” for the “dimensional ascension” of this theory. We will quickly review the core manifestations of these four forces in the classic scenario of a “corporate organization,” and use this as a frame of reference to lay the most solid theoretical foundation for our subsequent application of it to the analysis of the ultimate organizational form, the “state.”

This is both a refined summary of past thoughts and a “mental warm-up” for the grand historical narrative that is about to begin.

Section 1: The Expansionary Force: Growth, Innovation, and Endless Ambition

I. The Impulse for Growth: The Instinctive Pursuit of Market Share, Profit, and Scale

(1)The Greed for “Market Share”: Territory and Bargaining Power

An organization, after solving its most basic survival problems, its first intrinsic, almost irrepressible instinct is to “expand.” And this impulse for expansion, in the business world, its most primitive, most naked, and most undeniable form of expression is the almost greedy pursuit of “market share.”

To understand the deep roots of this pursuit, we must pull our vision back to the “prototype” of human organization—an ancient city-state or tribe. For this city-state, what was most important for its survival and development? Undoubtedly, “territory.” A larger territory meant more fertile land and water sources, which could support a larger population; it meant more abundant forests and minerals, which could be used to create better tools and weapons; it also meant a deeper “strategic buffer” zone, which provided greater room for maneuver in the event of foreign invasion. Territory was the source of all the city-state’s power, the fundamental guarantee of its continued existence in the brutal competition for survival.

Now, let us project this ancient metaphor onto the modern business battlefield. “Market share” is the “territory” that a company occupies on the invisible business map composed of consumer demand. The size of this “territory” also, fundamentally, determines the life, death, and future destiny of this company. What it brings is not just the sales figures on the books, but a profound, structural “power.” This power is mainly manifested in two aspects: strong “bargaining power” and an intangible “brand effect.”

First, is the establishment of “bargaining power.” A company that occupies a huge market share is like a powerful kingdom with a vast territory. It naturally has a strong say when it engages in games with its upstream and downstream “neighboring states”—that is, suppliers and distributors.

I once, at the bank, was responsible for reviewing two supporting enterprises that both supplied core components to a top domestic home appliance brand. Company A had exquisite technology and excellent product quality, but its market share was relatively small, and eighty percent of its orders came from that one home appliance giant. Company B, although its technology for a single product was not necessarily better than Company A’s, had, through diversified market development, become a common supplier to several major brands in the industry, occupying nearly forty percent of the market share.

These two companies, in our bank’s credit rating system, had completely different risk levels. Why? Because their “bargaining power” was worlds apart.

For Company A, that home appliance giant was its one and only “God.” The giant’s purchasing department could easily “squeeze its costs.” For example, by mandating a five percent price reduction every year, or extending the payment period for goods from thirty days to ninety days. Company A had almost no bargaining chips because it could not afford to lose this one and only “God” on which it depended for its livelihood. Its profit margin was extremely compressed, and the fragility of its operations was imaginable.

For Company B, the situation was completely different. When that home appliance giant tried to impose the same harsh conditions on it, Company B’s sales director could respond relatively calmly at the negotiating table: “We regret it if you cannot accept our offer. But the orders we have received from your competitors this year are already scheduled until the end of the year. We may have to prioritize their supply.” In this game, Company B, because of its vast “territory” (diversified market share), had a strong “confidence.” It could engage in a relatively equal dialogue with the downstream “hegemon,” thereby protecting a healthier, more sustainable “profit boundary” for itself.

Second, is the self-reinforcement of the “brand effect.” Market share is in itself the most powerful “advertisement.” When a consumer walks into a supermarket and faces a dazzling array of shelves, hesitating between two unfamiliar brands, he will subconsciously tend to choose the brand that seems “more familiar” and is placed in a more prominent position. And a brand with a high market share has precisely this “ubiquitous” advantage.

This advantage will form a powerful “positive feedback loop.” The more widely known, the more likely it is to be chosen; the more likely it is to be chosen, the higher its market share, and the more widely known it becomes. This “cognitive advantage” brought by market share is like an invisible “gravitational field,” constantly attracting new consumers into its camp.

Friends, you see, behind the greedy pursuit of “market share” is a profound, rational calculation originating from the survival instinct. It is the most primitive and most fundamental expression of an organization’s “Expansionary Force.” What it pursues is not just “bigger,” but “stronger” and “safer.” The Warring States period thinker Han Feizi once had a profound insight into the essence of power: “The affairs are in the four quarters, but the key is in the center. The sage holds the key, and the four quarters come to serve.”【Note: From the “Yang Quan” chapter of the Han Feizi. The meaning is: specific affairs are distributed in all directions, but the critical hub is controlled at the center. When a sage holds the critical hub, the forces from all directions will naturally come to submit and serve.】 For a company, the “industry center” status built by a huge market share is precisely that most critical “key” that can make suppliers, distributors, and even consumers “come to serve from all four quarters.”

Therefore, any ambitious organization, in the early stages of its life, will inevitably show an almost “obsessive” craving for market share. This craving, in itself, is neither right nor wrong. It is a manifestation of vibrant life. However, it is precisely in this endless conquest of “territory” that the organization will also face its first “choice”: is it to be satisfied with merely “occupying” more land, or is it to think about how to “cultivate” more beautiful and unique “fruits” on this land? This choice will determine whether the organization’s Expansionary Force will only stay at the dimension of “scale,” or can be sublimated to the higher-order dimensions of “profit” and “value.”

(2)The Craving for “Profit”: The Energy Source of an Organization

1. The Organization’s “Final Report Card”

If the pursuit of market share answers the question of “how big” a company is, then the craving for profit answers a more fundamental and more severe question—”how strong” this company is, and whether it truly “deserves to exist.”

Among the tens of thousands of corporate financial statements I have reviewed, I have seen too many “bloated” giants. Their operating revenues are astonishing, their market shares are prominent, and the growth stories in their press releases are exciting. But when I turn to the most inconspicuous and most honest final line of the income statement—the net profit—what I see is a pale, and even negative, answer.

Friends, this is an extremely dangerous signal. A company that has long “increased revenue without increasing profit,” no matter how beautiful its story, is in its essence like a patient who is constantly bleeding. It may still look strong, but its inner vitality is being quietly depleted.

Therefore, we must establish a most fundamental cognition: profit is not a vulgar worship of money. It is the “value” created by an organization for society, after deducting all the “social resources” it has consumed (including all costs such as labor, materials, capital, etc.), the final, irrefutable “net result” in the form of currency.

The market, this most just and most ruthless “final judge,” does not care how grand your vision is, or how hard your team works. It uses only one indicator to give a final score for all the activities of your company. This score is “profit.” A continuously negative score, no matter how many excuses there are, has only one final meaning: you have consumed more than you have created. From the perspective of society as a whole, you are not creating value, but destroying value.

2. The “Energy Currency” That Drives Everything

After deeply understanding the seriousness of profit as the “final report card,” we can further perceive the more dynamic and more strategic role it plays within the organization—the “energy currency” that drives all the organization’s activities.

An organization, like a living organism, needs to consume energy for all its life activities. And in the business world, profit is the most core, most universal carrier of this energy. It is the organization’s “calories,” its “ATP.”【Note: Adenosine Triphosphate (ATP): Is the most direct source of energy in living organisms, known as the “energy currency” of the cell.】

First, profit is the “provisions” for the “Expansionary Force” itself. Any further contention for market share, whether it is launching a price war or investing heavily in advertising and marketing, requires the “ammunition” of real money. A “naked” company with no profit, all its expansion can only rely on the fragile “crutch” of external financing. Once the capital market enters winter and this crutch is taken away, its path of expansion will come to an abrupt end. A company with abundant profits, on the other hand, has the confidence and composure to carry out continuous expansion by relying on its own “blood-making” ability.

Second, profit is the “shield” for building “Equilibrium Force.” The core reliance of an organization to survive the cold winter of the Contractionary Force is a healthy balance sheet. And on this sheet, the most solid “safety cushion”—the owner’s equity—its source is precisely the “undistributed profits” accumulated by the company over the years. Abundant profits can allow a company, in good times, to have the ability to increase R&D investment, build up cash reserves for winter, and reduce debt levels, thereby building for itself a “defensive fortification” sufficient to withstand any future storms.

Finally, and most importantly, profit is the “spark” that ignites the “Evolutionary Force.” All the “second curves” concerning the future of the organization that we will discuss in depth in the fourth section—whether it is the exploration of disruptive technologies or the incubation of new business models—they are almost, without exception, huge “cost centers” in their early stages. A great innovation requires years, or even a decade, of “sitting on the cold bench,” of continuous investment with no regard for returns. So, who will pay the salaries for these “dreamers” who are exploring the future? Who will bear the cost of the ninety-nine percent of “experiments” that are destined to fail? The answer can only be the company’s distinguished “first curve,” which is still stably creating huge profits. Without the continuous “blood transfusion” of profits from the “present,” any grand blueprint for the “future” will just be a castle in the air.

3. The “Patron” of the Renaissance: A Metaphor for Profit

To more deeply understand this “ultimate empowering” role of profit, let’s temporarily move our gaze from the modern business world back to the star-studded Italian Renaissance, more than five hundred years ago.

That was a rare era in human history, an era of a concentrated explosion of genius. Leonardo da Vinci, Michelangelo, Raphael… these immortal names, like stars, illuminated the entire night sky of Europe. We often attribute all this to the liberation of human thought and the awakening of art in that era. But behind this, there is a more “economic” “secret” that we often overlook.

This secret lies hidden in the inconspicuous “Palazzo Medici” in Florence. The Medici family, this financial giant that started with banking, it was precisely through the huge “profits,” which were astronomical at the time, earned from its commercial network throughout Europe, that it had enough “energy” to play the role of the greatest “patron of the arts” of that era.

Michelangelo’s David, Botticelli’s Primavera, Brunelleschi’s magnificent dome of the Florence Cathedral… behind all these treasures of human civilization shines the light of the Medici family’s gold coins—the Florin.

In this metaphor, the Medici family’s bank is the “first curve” that created huge profits. And the seemingly “useless,” purely artistic and scientific explorations it sponsored are the “second curve” concerning the future of the entire civilization.

The Medici family, by transforming commercial “profits” into investment in “Evolutionary Force” (art and science), not only achieved the century-long glory of Florence, but also, objectively, became the “chief venture capitalist” that ignited the entire European Renaissance.

Friends, this story profoundly reveals the ultimate meaning of “profit.” A great organization, its pursuit of profit is by no means just to make the shareholders’ wealth figures bigger. It is to obtain a higher “freedom”—a freedom to no longer worry about the immediate “survival,” so that it can invest its most precious resources into those greater causes that can better define the “future,” create “immortality.”

Of course, we must also be wary that when the pursuit of “profit” is detached from the fundamental mission of “creating value for customers” and degenerates into a pure, unscrupulous “numbers game,” it will also become a “poison” that kills the soul of the organization.

But in any case, a healthy, sustainable profit is always the most indispensable “energy cornerstone” for an organization to traverse cycles, resist risks, and ultimately embrace the “Evolutionary Force.”

As the Guanzi says: “When the granaries are full, they will know propriety and moderation; when their clothing and food are sufficient, they will know honor and shame.” For an organization, a healthy profit is the fundamental guarantee that allows its “granaries to be full” and its “clothing and food to be sufficient.” Only on this solid foundation can it pursue the higher-level “propriety and moderation” and “honor and shame” concerning “innovation,” “culture,” and “social responsibility.” This is the most profound and most noble “human” core of the craving for “profit.”

(3)The Obsession with “Scale”: Moats and Lock-in Effects

1. Scale as the Ultimate Barrier

If the pursuit of market share is the “breadth” declaration of an organization’s Expansionary Force, and the craving for profit is the fundamental guarantee of its “endurance,” then the obsession with “scale” is the most solid and most conclusive “strategic high ground” that the organization’s Expansionary Force seeks to conquer.

On the battlefield of business, scale does not just mean “big.” It is a powerful “potential energy” that can fundamentally change the “rules of the game.” When an organization’s scale reaches a certain critical point, it is no longer just a participant, but begins to become the “definer” of the rules. This ultimate pursuit of scale was brought to its zenith in the latter half of the twentieth century in American business history by a legendary “god of management.” He was the former CEO of General Electric, Jack Welch.

Welch set a simple, ruthless, yet extremely effective “military rule” for the massive industrial empire of General Electric: the “Number 1 or Number 2” strategy. He demanded that any business unit under GE must become the absolute “number one” or “number two” in its global market. If it couldn’t, then it had only three choices: be fixed, be sold, or be closed.

Behind this strategy was a profound insight into the power of “scale.” Welch firmly believed that in a mature, globalized market, only the very few “kings” at the top could truly master “pricing power,” enjoy the highest “profit margins,” and have the strongest “risk resistance” to withstand any cyclical storms. And the followers in third, fourth, or even further back positions would be forever imprisoned in the “quicksand” of low profits and high competition, struggling for survival.

This obsession with “scale” is not an entrepreneur’s irrational “arrogance,” but a profound rational calculation based on the endgame of business competition. Because it knows that when scale reaches its extreme, it will be able to build two of the most solid “moats” for the organization, moats that are difficult for any latecomer to cross: one is the “cost advantage” from the industrial age, and the other is the “network effect” belonging to the information age.

2. The “Heavy Sword” of the Industrial Age: Unparalleled Cost Advantage

The first, and most classic, “divine power” that scale can bring is an unparalleled “cost advantage.” It is like a heavy, broad “mysterious iron sword.” It is unadorned, but any light “foil” that tries to confront it head-on will be easily crushed.

This cost advantage is manifested in every link of the value chain.

First, is the “bargaining power” in procurement. I have reviewed a food processing company that supplied large supermarkets, and also a small artisan workshop that only supplied community boutiques. The former, because of its annual procurement volume of hundreds of millions, could, in an almost “predatory” way, get the lowest purchase price from the upstream agricultural product suppliers. The latter, on the other hand, could only passively accept the market price. This cost difference, which has already formed at the “starting point,” often has already determined the final outcome.

Second, is the “economies of scale” in production. A modern factory built with an investment of one billion yuan, if its high fixed costs are used to produce only ten thousand products, then the cost allocated to each product will be astonishing. But if it is used to produce ten million products, then this fixed cost will be diluted to be insignificant. The larger the scale, the lower the average production cost per unit. This is the most basic “physical law” of the industrial age.

Finally, is the “cost dilution” in R&D and marketing. An R&D investment of one hundred million dollars for a new drug, or a fifty-million-dollar global brand advertising campaign, is unimaginable for a company with an annual sales of only a few hundred million dollars. But for a multinational pharmaceutical company or consumer goods giant with an annual sales of tens of billions of dollars, this expense, allocated to every pill or every bottle of beverage it sells, may be only a few cents.

Friends, you see, the cost advantage, in this way, at every link, provides the giant “king” with a little bit of a “lead.” And when these small advantages are stacked up layer by layer along the entire value chain, the final “cost chasm” it forms is enough to deter any “new player” trying to enter this market, making it unprofitable.

3. The “Magic Web” of the Information Age: The Winner-Take-All Network Effect

If “cost advantage” is the “physical attack” of scale in the “atomic world,” then the “network effect” is the more desperate “magical attack” that scale casts in the “bit world.”

The essence of the network effect is that the “value” of a platform is proportional to the “square” of its “user scale.” A telephone network with only one user has a value of zero. But when it has a million users, its potential “connection value” will grow explosively, on the order of trillions.

This effect constitutes the “soul” of all platform-based business models.

In the fields of social media, operating systems, and e-commerce platforms that we are familiar with today, the network effect has shown its cruel “winner-take-all” side even more.

A social platform is valuable to you because your friends are on it. A platform with all your friends, and a platform with only three or five of your friends, even if the latter has more advanced technology and a more beautiful interface, you are almost impossible to migrate to. Because the cost of migration is that you will lose the value of the entire “social network.”

An operating system is powerful not just because of its own performance, but more so because it has a huge “application ecosystem” composed of millions of developers. Developers will prioritize developing applications for the operating system with the most users, and users will in turn prioritize choosing the operating system with the richest applications. This is a self-reinforcing, almost unbreakable “positive feedback loop.”

4. The Lock-in Effect: Leaving Users “No Way Out”

When the two powerful forces of cost advantage and network effect act together on a market, a final, desperate “lock-in effect” for competitors is formed. 【Note: Lock-in effect: refers to the situation where, when the cost for a user to switch products or services is too high, the user will have difficulty leaving even if a better alternative appears on the market, because they are “locked in.”】

The reason users find it difficult to leave is not just because “the new product is not good enough,” but because “the cost of leaving is too high.” This cost could be the “cognitive cost” of needing to relearn a new operating system; it could be the “technical cost” of needing to migrate all of your past ten years of data; or it could be the “emotional cost” of needing to give up all the “social assets” or “reputation assets” you have accumulated on a platform.

Friends, at this point, we can see clearly that “scale,” this largest “beast” fed by the organization’s “Expansionary Force,” what it ultimately seeks to build is not just a larger “size.” What it seeks to build is a “business barrier” that is impenetrable, one that “competitors can’t get in” and “existing users can’t get out.”

Sun Tzu’s Art of War says: “Therefore, the skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy.” The meaning is that a brilliant general always first puts himself in a position where he cannot be defeated, and then waits for the opportunity to defeat the enemy.

The deepest strategic intent behind the obsession with “scale” is precisely this. It is to, on the battlefield of business, through building the dual “moats” of cost and network, create an “invincible position” for oneself. This is the most stable and most awe-inspiring ultimate form that the Expansionary Force can achieve on its path of pursuing growth.

II. The Desire for Innovation: The Exploration of New Technologies, New Models, and New Frontiers

(1)Schumpeter’s “Creative Destruction”: Innovation as a Tool to Break Growth Barriers

1. The “Ceiling” of Growth

We have seen in the previous sections how an organization, driven by the “impulse for growth,” can, through the ultimate pursuit of market share, profit, and scale, build a seemingly impregnable business empire. However, any growth within a given “paradigm” is like a race car speeding on a straight highway. You can push the speed to its theoretical limit by continuously optimizing the engine and improving the aerodynamics. But no matter how hard you try, this highway eventually has its end.

This end is the “ceiling of growth.” It may come from market saturation. When all potential customers have been divided up by you and your competitors, what remains is only a cruel, increasingly low-profit “zero-sum” game of the existing stock. It may also come from technological limits. When a technology, such as the thermal efficiency of an internal combustion engine, has physically approached its upper limit, any further “improvement” will have a sharply declining return on investment.

When an organization invests all the energy of its “Expansionary Force” into this kind of “linear,” “incremental” growth, it is like a diligent farmer trying to squeeze out the last bit of harvest from a piece of land that has been harvested countless times. His diligence is respectable, but his future is firmly locked by the “output limit” of this land.

At this point, if the organization still wants to survive and continue to expand, it must complete a fundamental identity transformation, from “farmer” to “Columbus.” It can no longer be satisfied with intensive farming on known land; it must bravely set sail to find an unknown “new continent.”

This act of “finding a new continent” has only one name in the business world—innovation.

2. The “Engine” of Disruption

The Austrian economist Joseph Schumpeter【Note: Joseph Schumpeter (1883-1950): An Austrian-American economist, one of the founders of modern innovation theory. His core ideas have profoundly influenced our understanding of the dynamic evolution of capitalism.】, hailed as the “father of innovation theory,” with his unique, history-penetrating gaze, painted for us a picture of capitalism that is completely different from the traditional economic textbooks, a picture full of “dynamics” and “storms.” In his view, the essence of capitalism is not the static system that pursues “equilibrium” and “stability” as depicted in textbooks. On the contrary, its soul lies in a never-ending process of “industrial mutation” that continuously revolutionizes the economic structure from within.

Schumpeter gave this process a name that is both powerful and dialectical—”creative destruction.”【Note: Creative Destruction: The core concept of Schumpeter’s innovation theory, which refers to the process by which innovation, through the introduction of new products, technologies, or business models, mercilessly destroys old economic structures, industries, and enterprises while creating new value.】

The profundity of this term lies in its tight binding of the two seemingly opposite words, “creation” and “destruction.” It tells us that true innovation is never a gentle “improvement”; it is a cruel, metabolic “revolution.”

The invention of the automobile was not to make the horse-drawn carriage run faster or more comfortably. Its appearance, its ultimate purpose, was to fundamentally “destroy” the entire horse-drawn carriage industry—from the breeding of horses, to the manufacturing of carriages, to the employment of coachmen. It did not run a better race on the old track; it directly opened up a brand new “new track,” defined by the internal combustion engine and the highway, and let the old track become completely desolate.

This is the true power of “innovation,” as the highest form of an organization’s “Expansionary Force.” It is no longer satisfied with competing for share in the existing “territory.” Its ambition is to, through a “dimensional reduction strike,” make the old “territory” itself worthless. What it pursues is a “paradigm”-level expansion.

3. The “Five Forms” of Innovation

Schumpeter further summarized this powerful “creative destruction” into five core forms of innovation. These five forms, like five different “weapons,” together constitute the “arsenal” of an organization’s “Evolutionary Force.”

(1) The introduction of a new product, or a new quality of a product. This is the form of innovation we are most familiar with. For example, the emergence of mRNA vaccines. It is not a simple improvement of traditional inactivated vaccines, but a new technological paradigm. It greatly shortened the R&D cycle of vaccines and opened up the infinite possibilities of gene therapy.

(2) The introduction of a new method of production. This also has disruptive power. For example, the invention of the “Bessemer process” for steelmaking in the mid-nineteenth century. 【Note: Bessemer Process: A steelmaking method invented by the British inventor Henry Bessemer in 1856, marking the beginning of the modern steel industry. It greatly reduced the production cost of steel, turning steel from a rare precious metal into a basic industrial material that could be used on a large scale to build railways, bridges, and skyscrapers.】 It reduced the production cost of steel by nearly ninety percent. This seemingly just an innovation in the “production link” directly provided the most fundamental, cheap “material basis” for the subsequent railway age and skyscraper age.

(3) The opening of a new market. This means selling a product to a customer group that has never been reached before. For example, the emergence of the internet created a new, vast “digital native” market. The consumers in this market, their information acquisition habits, communication methods, and value preferences are all completely different from those of their parents’ generation. Any organization that can be the first to “understand” this new market will gain a huge first-mover advantage.

(4) The conquest of a new source of supply of new materials or half-manufactured goods. This can also reshape the entire industrial landscape. For example, the success of the “shale gas revolution” in the United States in the early 21st century. 【Note: Shale Gas Revolution: Refers to the technological revolution that emerged in the United States at the beginning of this century, which uses hydraulic fracturing and horizontal drilling technology to extract natural gas on a large scale from shale formations. It has greatly increased the natural gas production of the United States and has profoundly changed the global energy landscape.】 Through technological innovation, it transformed a resource that was once considered “not worth exploiting” into a huge, cheap energy supply, and has profoundly changed the global geopolitical and energy landscape.

(5) The carrying out of the new organization of any industry. This means to subvert the traditional “rules of the game” and “value chain” of an industry. For example, the “creator economy” spawned by platforms like YouTube and Douyin. It has liberated the “right to produce content,” which was once monopolized by a few large media companies, to hundreds of millions of independent creators, thereby completely reconfiguring the organizational form of the entire media and entertainment industry.

Friends, whether it’s a new product, a new method, a new market, a new supply, or a new organization, these five forms of innovation all point to the same ultimate goal—”breaking the wall.” Breaking the invisible “growth ceiling” jointly built by market saturation, technological stagnation, and rule solidification.

It is the bravest and most intelligent expression of an organization’s “Expansionary Force.” It is no longer a simple, linear “quantitative expansion,” but a non-linear, “qualitative leap” full of uncertainty. An organization that has lost this “desire for innovation,” even if it still has the largest scale and the most abundant profits today, has already, in spirit, become a “living fossil” on its way to sclerosis.

The Book of Songs says: “Though Zhou is an old state, its mandate is ever new.”【Note: From the Book of Songs, Major Odes, King Wen. The meaning is: Although the Zhou dynasty is a state with a long history, its heavenly mandate lies in its continuous renewal.】 This sentence is also an unbreakable truth for an organization. The vitality of an organization lies not in how long its history is, but in whether it possesses that never-ending “spirit of renewal,” the courage to “revolutionize” itself. This is the ultimate secret of “innovation” as the soul of the Expansionary Force.

(2)Christensen’s “Innovator’s Dilemma”: The Game Between Sustaining and Disruptive Innovation

1. The Great Paradox

In the pantheon of business thought, if Joseph Schumpeter is the far-sighted “prophet” who declared “innovation” as the “soul” of capitalism, then the Harvard Business School professor Clayton M. Christensen【Note: Clayton M. Christensen (1952-2020): A renowned American management scholar and master of innovation theory. He became famous for his 1997 book The Innovator’s Dilemma and is hailed as the “father of disruptive innovation.”】 is more like a “pathologist” with a scalpel. He spent his entire life trying to dissect the most perplexing and most fascinating “paradox” in business history: why do the best-managed, most-attentive-to-customer-needs, and most-consistently-profitable great companies, when faced with certain types of market or technological changes, instead appear so vulnerable and are ultimately disrupted by some seemingly unknown “small players”?

This question strikes at the very core of all our business beliefs. If “success is the mother of success,” then why do these most successful “mothers” often fail to give birth to the “child” of the future, and are even killed by their own “children”?

Christensen’s greatness lies in his not simply attributing this problem to the “arrogance,” “bureaucracy,” or “stupidity” of large companies. On the contrary, with a pen full of empathy and reverence, he revealed to us a more profound, structural tragedy: the failure of these great companies was not because they “did something wrong”; on the contrary, it was because they did all the “right” things “too well.” And it was precisely these “best management practices,” which are revered as gospel in business school textbooks, that ultimately led them to the cliff of disruption.

To unravel this paradox, Christensen provided us with his sharpest intellectual scalpel—the clear division of “innovation” into two distinct types: “sustaining innovation” and “disruptive innovation.”【Note: Sustaining vs. Disruptive Innovation: The core dualistic division in Christensen’s innovation theory. Sustaining innovation refers to improving product performance within an existing value network to serve mainstream customers. Disruptive innovation, on the other hand, refers to the introduction of a new value proposition (usually simpler and cheaper) to open up new markets or disrupt existing ones.】

2. Sustaining Innovation: Striving to Climb Higher on the Old Mountain

“Sustaining innovation” is the game we are most familiar with and all mature enterprises are best at. Its essence is to continuously launch “better” products on a given “value trajectory” that is jointly recognized by all market participants.

For example, in the automotive industry, this means making the engine’s horsepower stronger, the fuel consumption per hundred kilometers lower, the interior space more spacious, and the seats more comfortable. In the computer industry, this means making the chip’s processing speed faster, the hard drive’s storage space larger, and the screen’s resolution higher.

This type of innovation is an “upward” race. All participants are striving to climb the same steep “mountain” named “mainstream market demand.” And the best-managed companies are undoubtedly the best climbers in this mountaineering competition.

They have the most advanced “climbing equipment”—strong R&D teams and abundant funds.

They have the most accurate “maps”—they regularly and deeply survey their largest and most demanding “mainstream customers,” asking them, “What do you need next?”

They also have the most powerful “logistics support system”—their financial decision-making model, centered on “return on investment,” can accurately calculate how much certain profit growth the R&D investment for the next “ascent” can bring.

Friends, sustaining innovation is the most steady and most rational expression of an organization’s “Expansionary Force.” It serves the “impulse for growth,” and its goal is to, on the existing “territory,” by continuously providing better products, to consolidate its rule and obtain more abundant “profits.”

3. Disruptive Innovation: Discovering New Species in an Unfrequented Valley

However, just as these great “mountaineers” were constantly breaking records for climbing height on the main peak they were familiar with, a silent revolution, sufficient to change the entire “tectonic plate,” was quietly happening in an inconspicuous “valley” outside their field of vision.

This is “disruptive innovation.”

Unlike sustaining innovation, which pursues “better,” disruptive innovation, at its birth, often performs “worse.”

The technology it uses is completely subpar in mainstream performance indicators. For example, the earliest personal computers, their computing power was a ridiculous “toy” compared to the “mainframes” that served large enterprises.

The market it faces is marginal, non-mainstream, and even “non-existent.” For example, the earliest transistor radios, their sound quality was coarse and could not meet the needs of “audiophiles” who pursued high-fidelity sound. Their only customers might have been a group of “teenagers” who just wanted to listen to rock and roll on the beach.

Its profit margin is meager and uncertain. It cannot contribute any meaningful financial returns to a mature company accustomed to high profits.

However, it is precisely these seemingly “worthless” “ugly ducklings” that often have some unique “new value” that is ignored by the mainstream market—they may be smaller, cheaper, more portable, or more convenient to use.

And these “new values” are precisely able to meet the special needs of a niche “fringe customer” group that is “looked down upon” by mainstream enterprises. This forgotten “fringe market” is like a warm “ecological incubator” with no natural enemies, providing the most initial and most precious “living space” for this fragile “new species” of disruptive innovation.

In this “incubator,” disruptive technology will, with a steeper “learning curve” than mainstream technology, undergo rapid “iteration” and “evolution.” Its performance will get better year by year; its cost will get lower year by year.

Until one day, when its performance finally reaches the “minimum threshold” acceptable to the mainstream market, a “species invasion” of “creative destruction” will inevitably occur.

4. The “Innovator’s Dilemma”: A Rational “Suicide”

Now, we come to the core of this tragedy. Why do the “mainstream giants,” with the most powerful resources and the smartest minds, watch these “small players” grow up step by step under their noses and ultimately disrupt their empires?

The answer is: because the giant’s internal “rational decision-making” system, which has been tempered over a thousand times and is near perfect, a system designed to “serve mainstream customers well” and “maximize shareholder returns,” will systematically and automatically say “no” to all signals of “disruptive innovation.”

Let’s review this “rational suicide.” One of the most classic cases in Christensen’s research is the transformation of the American steel industry.

In the mid-twentieth century, “integrated steel mills” like U.S. Steel were the kings of the industrial world. They had huge blast furnaces and could produce the highest quality “sheet steel” for making cars and home appliances. This was their most profitable “mainstream market.”

At the same time, a disruptive technology called the “electric arc furnace” appeared. It used scrap steel as a raw material and produced steel of poor quality, which could only be used to make the lowest-end construction material, rebar.

Now, please play the role of the CEO of U.S. Steel. Your sales team has just jubilantly reported that they have signed another huge order for several million tons of automotive sheet steel from General Motors, with a profit margin of twenty percent. On the other hand, one of your young engineers has timidly suggested that the company should invest in the dirty, messy “electric arc furnace” technology, with a profit margin of only five percent, to compete with the small workshops for the “garbage market” of “rebar.”

How would you choose? Any rational CEO who is responsible to his shareholders would not hesitate to continue investing resources in the high-profit, certain “mainstream” market. And would throw the engineer’s “stupid” suggestion into the wastebasket.

This is the “innovator’s dilemma.”

An organization is “hijacked” by its own most successful “business model” and its own highest-quality “customers.”

Its “Equilibrium Force”—the mature financial models, market research processes, KPI assessment systems—has been pushed to the extreme. This powerful “Equilibrium Force,” while helping the organization to better serve the successes of “yesterday,” has also become the most powerful “Contractionary Force,” systematically strangling all possibilities leading to “tomorrow.”

The organization’s “Evolutionary Force,” in this way, in one “rational” and completely “correct” business decision after another, has been silently strangled.

The ancient parable of “Bian Que Seeing Duke Huan of Cai”【Note: “Bian Que Seeing Duke Huan of Cai”: An ancient Chinese fable from the Han Feizi, Yu Lao chapter, which tells the story of the divine physician Bian Que who repeatedly warned Duke Huan of Cai that he had a minor illness. But the Duke, feeling well, refused treatment, eventually leading to the minor illness developing into an incurable disease and his death.】 perfectly analogizes this tragedy. Disruptive innovation, at first, is like the “minor illness” that is “in the skin,” painless and not itchy. The mature organization, feeling well, chooses to ignore it. But when this “minor illness” finally penetrates to the “bone marrow” and begins to comprehensively erode the organization’s core market, it is already too late.

This profound insight of Christensen provides us with the most powerful “microscope” for understanding the eternal, tension-filled game between an organization’s “Contractionary Force” and “Evolutionary Force.” It tells us that an organization’s true “evolution” often does not happen on the main channel, in the much-watched “flagship race.” It often happens in the most inconspicuous, most ignored, and most uncertain “marginal tributaries.” And the highest wisdom of a leader lies in whether he has enough foresight and courage to reserve a “redundant” resource and a “tolerant” patience for these “noisy” and “messy” “margins.”

III. Case Analysis: Organizational Forms Dominated by the Expansionary Force

(1)Huawei’s “Wolf Culture”: Extreme Expansion Under Survival Pressure

The skeleton of theory must ultimately be filled with the flesh and blood of reality. After systematically deconstructing the two cores of the “Expansionary Force”—the “impulse for growth” and the “desire for innovation”—we must now shift our focus from abstract definitions to the real battlefield of business. We will, through two typical samples that are highly characteristic of their era, intuitively feel what kind of fascinating and terrifying “savage growth” state an organization, completely dominated by the “Expansionary Force,” will exhibit in the early stages of its life.

These two samples, like two mirrors, reflect the vastly different faces of the Expansionary Force in different environments. The first is Huawei, born in the “survival jungle” of China’s early reform and opening-up, a jungle of extreme resource scarcity. Its expansion is an epic of living towards death, driven by a “sense of hunger.” The second is the first internet bubble, which erupted in the “promised land” of Silicon Valley in the late 1990s, a land of extremely abundant capital. Its expansion was a frenzied land grab for the future business landscape, jointly ignited by “dreams” and “capital.”

Different backgrounds, different outcomes, but their organizational forms and behavioral characteristics under the dominance of the “Expansionary Force” show a striking consistency. They jointly paint a vivid sketch of an “expansionary organization” for us.

Let’s first turn the clock back to the China of the 1990s. The telecommunications equipment market at that time was the domain of Western giants. Seven multinational companies from developed countries, including Alcatel, Lucent, Nokia, and Siemens, firmly controlled the “rules of the game” of the Chinese market with their advanced technology and powerful brands. They were collectively known as the “Seven States, Eight Systems” in the industry. For Huawei, which had just started in a dilapidated residential building in Shenzhen and made its first pot of gold by acting as an agent for a Hong Kong company’s switches, this was undoubtedly a hell-level opening. It had no technological advantage, no capital support, and certainly no brand reputation. In the eyes of these industry giants, it was not even a competitor worth noticing.

Under this extreme survival pressure, Huawei’s only choice was to stimulate its “Expansionary Force” to the extreme, to squeeze out the energy of every cell, to find even the slightest crack for survival. This organizational character, forged in desperation and extremely eager for survival and victory, was later summarized by its founder, Ren Zhengfei, in a highly biological metaphor, into a cultural label that is both awe-inspiring and admirable—”wolf culture.”【Note: Wolf Culture: Generally refers to a corporate culture that emphasizes teamwork, perseverance, an extreme desire for goals, and a strong aggressiveness towards competitors. This concept became widely known due to Huawei’s successful practice and has become a highly controversial and influential management label in the Chinese business community.】

The core of “wolf culture” can be deconstructed into three levels, and these three levels are a perfect embodiment of the organizational behavior dominated by the “Expansionary Force.”

First, is a keen sense of smell and an extreme greed for opportunities. A wolf pack in the wilderness has an innate, irrepressible sensitivity to the smell of blood. Early Huawei also had an almost obsessive sense of smell for the “smell of blood” in the market—that is, the needs of customers and the weak points of competitors. When the Western giants were all focused on big cities like Beijing, Shanghai, and Guangzhou, serving the lucrative “big customers” like the Ministry of Posts and Telecommunications and provincial companies, Huawei, this hungry “wolf,” with its deep understanding of China’s national conditions, plunged headlong into the vast rural market that was disdained and ignored by the giants.

In the most remote and harshest towns and villages, Huawei’s salespeople, carrying heavy equipment, trudged on muddy dirt roads. They, with the directors of county post and telecommunications bureaus and the heads of township telephone offices, at greasy dinner tables, over cup after cup of white wine, established the most grassroots and most solid customer relationships. They had slept in equipment rooms, slept on the floor, and endured countless slights and cold shoulders. As a bank loan officer, when I went to the countryside for post-loan inspections in those days, I had personally witnessed such scenes: in the simple guesthouses where we stayed, we often ran into young people from Huawei. They were covered in dust, but their eyes revealed a fierceness of not giving up until the goal was achieved. They used an almost “masochistic” struggle to, from the “cracks between the bones” that the giants disdained to fight for, snatch the first piece of “meat” on which to survive. This greed of going all out for any small opportunity, regardless of the cost, is the most typical manifestation of the “Expansionary Force” when resources are scarce.

Second, is the fearless spirit of attack. Once a wolf pack has locked onto its target, it will launch a continuous, relentless attack until the prey is completely brought down. Huawei, in market competition, also showed this chilling aggressiveness. In order to snatch food from the mouths of powerful opponents, Huawei adopted the simplest and most effective “coyote” tactics: price wars and service wars.

At the same performance level, Huawei’s equipment price could be thirty percent, or even fifty percent, lower than its competitors. This “suicidal” pricing was incomprehensible and impossible to follow for the multinational giants, who were burdened with high global R&D and management costs. Huawei used its extremely low operating costs to drag the high and mighty technological barriers into a mud-splattering price brawl.

At the same time, it also promised to provide “nanny-style” service that was far superior to its competitors and available on call. If a customer’s equipment broke down in the middle of the night, a call to a Western company’s engineer might find him still asleep, needing to report layer by layer and wait for arrangements the next day. But a Huawei engineer could, within half an hour, riding a bicycle, appear in the equipment room and not leave until the problem was solved. This “saturation attack” of doing whatever it takes to win an order made the multinational giants, who were accustomed to high profits and a slow pace, complain endlessly and find it difficult to adapt. Huawei used a “desperate” fighting style to overcompensate for the slight inferiority of its products in technology with an absolute advantage in service. This is precisely the asymmetrical competition strategy chosen by the “Expansionary Force” when facing a powerful opponent.

Third, is the internal “horse race” and the generous rewards for the winners. The position of the alpha wolf is never hereditary; it is won through one cruel battle after another by the strongest and most cunning wolf. Huawei’s internal environment is also full of this Darwinian competitive atmosphere. Ren Zhengfei has a famous saying: “Huawei has no academicians, only ‘yard soil.’ If you want to be an academician, don’t come to Huawei.”【Note: “Academician” and “Yard Soil”: The “yard soil” (院土, yuàn tǔ) here is not an official term, but an internal term used by Ren Zhengfei to distinguish it from the highest honor in the Chinese scientific research system, “academician” (院士, yuàn shì). It is meant to emphasize that Huawei’s value orientation is to reward the “warriors” who can open up new territories and make actual market contributions, not just the experts with academic titles.】 What he advocated was a value orientation that abandoned all empty titles and judged heroes only by their “military exploits.”

At Huawei, a fresh graduate, as long as he can bring back orders and overcome technical difficulties, can be promoted exceptionally and receive astonishingly generous bonuses and dividends in a very short period. And those “old heroes” who have made great contributions in the past, once they can no longer keep up with the company’s development pace and become so-called “sedimented costs,” will also be mercilessly marginalized, and even eliminated. This intense internal “horse race” mechanism, like a high-pressure boiler, transforms the “selfish” profit-seeking motivation of every individual into the fuel that drives the company as a whole to charge forward, pushing the organization’s “Expansionary Force” to the extreme.

(2)The Mania of the Internet Bubble: A Land Grab of Models Catalyzed by Capital

If Huawei’s “wolf culture” was an expansion of living towards death, forced out by hunger and the desire for survival in the “survival jungle” of extreme resource scarcity, then, at almost the same time, on the other side of the ocean, in the United States, a grand drama of a completely different nature, but one that also took the “Expansionary Force” to its extreme, was being staged. The stage of this drama was not the muddy country roads, but the bright and clean offices of Silicon Valley; its driving force was no longer the fear of survival, but an almost infinite optimism and imagination for the future; and its most core fuel was not the cups of white wine drunk by salespeople, but the seemingly inexhaustible, massive capital provided by venture capital. This was the first internet bubble, which swept the globe at the turn of the century and finally ended with a loud bang—also known as the “.com bubble.”【Note: .com bubble: Refers specifically to the speculative frenzy for internet-related companies in the global capital markets, especially the Nasdaq market in the United States, between 1995 and 2001. It was characterized by an irrational surge in stock prices and an eventual crash.】

This bubble was by no means a simple collective irrationality. It was the ultimate feast of the organization’s “Expansionary Force,” catalyzed by the dawn of a technological revolution, the innovation of financial tools, and a brand new business philosophy. It showed us, in an almost “performance art” way, what a spectacular and yet fragile sight an organization, and even an entire business ecosystem, would present when the “desire for innovation” is infinitely amplified by the flood of capital and completely overwhelms all the “Contractionary Forces” of “risk” and “common sense.”

1. The Discovery of a New Continent: The “Genesis” Moment that Ignited the Frenzy

To understand the origin of this frenzy, we must turn the clock back to 1995. That was an era filled with a sense of the “end of history” and a pervasive mood of optimism. The Berlin Wall had fallen, the clouds of the Cold War had dispersed, and the political scientist Francis Fukuyama had even proposed the famous “End of History” thesis. 【Note: The End of History: A viewpoint proposed by the American political scientist Francis Fukuyama in his 1992 book The End of History and the Last Man. He argued that the developmental history of human society is an evolutionary process with liberal democracy as its final form, and that the end of the Cold War marked the end of this evolution.】 Against this grand backdrop, the popularization of the personal computer and the birth of the World Wide Web opened a window for people to a brand new “digital continent.” And what truly turned this window into a gate that everyone could rush through was a company called Netscape and its Navigator browser.

On August 9, 1995, Netscape, a company that was just over a year old and had not yet made any profit, went public on the Nasdaq. Its offering price was set at $14 per share, but after the market opened, it was wildly pursued by enthusiastic investors to $75, and finally closed at $58. A loss-making company, on the first day of its listing, saw its market value soar to nearly $3 billion. This “miracle,” which at the time completely defied all traditional valuation logic, was like a starting gun, officially announcing the beginning of the internet bubble era.

The reason Netscape’s IPO had such a powerful “detonating” effect was because it implanted a new “cognitive model” in everyone’s mind: a new era has arrived, and all the rules of the old world will no longer apply on this new continent. The old gods of the industrial age—profit, cash flow, assets—are dead; and the new stars representing “future possibilities”—users, traffic, click-through rates—are rising.

2. The Remodeling of the Rules of the Game: A Land Grab for “Eyeballs”

Once this new “cognitive model” was established as the “consensus” of the market, an unprecedented “land grab” for “seizing the new continent” swept across the entire business world at a viral speed. This movement completely reshaped the rules of the game of business competition.

First, was the remodeling of “business philosophy.” In this movement, an economic theory of the network known as “winner-take-all” became the “textbook” for all entrepreneurs and investors. This theory holds that in a platform-based business with a strong network effect, there is no second place. The “first mover” who first accumulates a sufficiently large user base will, through the self-reinforcement of the network effect, build a moat that latecomers cannot cross.

This belief directly led to the birth of a new and extremely dangerous business strategy: “growth at all costs.” The company’s primary goal was no longer to verify a sustainable “profit model,” but to, at any cost, “burn money” as fast as possible in exchange for “users” and “eyeballs.” Profit was postponed indefinitely. People believed that as long as you had enough users, you had the future; as long as you occupied the track, a profit model would be found one day.

Second, was the remodeling of the role of “venture capital.” In the past, venture capital (VC) was a relatively niche and cautious industry. In the .com bubble, VCs transformed into the “arms dealers” and “accelerators” of this land grab. Their investment logic also underwent a fundamental change. They were no longer patiently nurturing a company that could grow healthily, but were more like “rocket launch engineers.” Their sole goal was to inject enough “fuel” (capital) into the startup company to allow it to, in the shortest possible time (usually 12 to 18 months), rush to the “escape layer” called “Nasdaq,” achieve an IPO, and thus allow them to cash out at a high price and get a hundredfold or even a thousandfold return.

3. The Organizational Form of the Frenzy: The “Phoenix” Born to “Burn”

Driven by this new philosophy and capital logic, the organizational form of the typical “.com” company of that era also showed a unique “phoenix-like” characteristic, one born to “burn.”

They were the embodiment of “dreams.” Every company had a dream that was so grand it was almost unrealistic. The dream of Pets.com【Note: One of the most representative failures of the American internet bubble era. The company was an online retailer of pet supplies, founded in 1998. It quickly gained extremely high visibility through large-scale advertising and marketing, but went bankrupt and liquidated just nine months after its IPO in 2000, becoming a classic symbol of that era’s inability of business models to support “dreams.”】 was to become the “sole portal” for all American pet owners. The dream of Webvan【Note: One of the largest and most tragic failures of the American internet bubble era. The company was an online grocery delivery service. Its business model was extremely aggressive, investing over a billion dollars to build highly automated warehouse centers and a huge logistics fleet across the United States in an attempt to subvert the traditional retail industry. Due to its unsustainable cost structure, it declared bankruptcy in 2001, becoming a classic business case for reflecting on the “cash-burning” expansion model.】 was to use a fully automated logistics system to subvert the entire American grocery retail industry. These dreams were repeatedly told to the media and investors through carefully packaged business plans and inflammatory roadshows.

They were the “furnaces of capital.” Their sole purpose of existence was to “burn” the huge funds invested by VCs as quickly as possible and transform them into some “story material” that could be further amplified in the capital market—such as a continuously growing number of user registrations, or an impressive ad placed during the “Super Bowl.” In 1999, during the “Super Bowl,” the most expensive advertising slot in the United States, there were more than a dozen “.com” company ads at the same time. They burned a total of more than forty-four million dollars in advertising fees for this, and the vast majority of them had no stable source of income. The most famous among them, Pets.com, won the love of the whole nation with a cute “sock puppet” image, but also, for this, burned nearly three hundred million dollars in investment, and finally, after the bubble burst, quietly went out of business.

They were also the “laboratories of culture.” In order to attract and retain the top, young, and rebellious engineers, these companies deliberately created a “utopian” culture that was the complete opposite of the traditional pyramid organization. The offices were filled with free snacks, game consoles, and beanbag chairs. There was no strict dress code, no strict hierarchy. Everyone was granted a huge amount of “stock options,” though they might never be able to cash them, and was told that they were participating in a great revolution to “change the world.”

4. The End of the Game: When the Music Stops

Friends, this deafening “symphony of expansionary force,” jointly composed by the “desire for innovation” and the “greed of capital,” finally came to an abrupt end in the spring of 2000.

When the Federal Reserve began to tighten its monetary policy to cope with an overheating economy, and when the financial reports of several star “.com” companies revealed the cruel reality that their “cash burn” rate was far exceeding their “user growth” rate, the market’s confidence began to waver.

The game of the “greater fool theory,”【Note: Greater Fool Theory: A speculation theory which states that the price of an asset can rise not because of its intrinsic value, but because speculators believe that there will always be a “greater fool” who is willing to buy it from them at a higher price in the future.】 which had supported the entire bubble, had finally reached its last round—there was no “greater fool” to take over.

Panic, like a plague, instantly replaced greed. The Nasdaq index, from its historical high of over 5,000 points in March 2000, collapsed by nearly eighty percent in just over a year. Trillions of dollars in paper wealth vanished. Countless “billionaires,” once chased by the media, became ordinary people with nothing again. The grand party, full of hope and dreams, finally ended with only a mess left behind.

However, friends, our review of this bubble must not just stop at the level of “ridicule.” Because from a grander, historical perspective, this seemingly “irrational” frenzy was precisely the “chaotic period,” full of “waste” and “disorder,” that the “Evolutionary Force” had to go through when opening up a new continent.

Although it destroyed countless companies and fortunes, it also left two of the most precious “legacies” for our era.

The first is a “physical” legacy. The hundreds of billions of dollars invested in the internet field by VCs and the capital market in those few short years did not completely disappear. They became the “fiber-optic network,” with a total length of more than tens of millions of kilometers, laid across the North American continent, and even at the bottom of the Atlantic and Pacific oceans. This “over-invested,” and at the time considered a huge waste, “information superhighway,” after the bubble burst, its price became extremely low. And it was precisely this cheap and powerful infrastructure that paved all the roads for the later arrival of the truly great Web 2.0 era of Google, Facebook, YouTube, and Netflix.

The second is a “cognitive” legacy. This painful failure taught an entire generation of entrepreneurs and investors the most profound and most expensive “risk education lesson.” It brought people back from the fanatical fantasy of “business models” to a simple reverence for “cash flow” and “core technology.” The few companies that survived the ruins of this bubble, such as Amazon and Google, survived precisely because they, in the midst of the clamor, always adhered to a most basic business common sense and, while others were burning money on advertising, quietly built their own truly impregnable “technical moat.”

The Zhuangzi, Free and Easy Wandering says: “And if the accumulation of water is not deep, it will not have the power to bear a large boat.” Friends, the mania of the internet bubble was like a sudden, seemingly magnificent “flood.” Although its momentum was great, because it had no “foundation,” it could not bear any “large ship” that could sail into the future.

And Huawei’s “wolf culture” is like a “canal,” painstakingly carved out from the hardest rock crevices. Although its flow was slow and its appearance was unremarkable in the early stages, because it had the most solid “riverbed,” it ultimately converged into the real “great river,” the one that can traverse all cycles and rush into the sea.

Section 2: The Contractionary Force: The Inevitable Trend of Entropy, Sclerosis, and Decline

I. The “Law of Organizational Entropy”: The Natural Tendency from Order to Disorder

(1)The Physics Origin: A Popular Explanation Using the Example of a Messy Study

If the “Expansionary Force” is the “accelerator” that drives the organization, this machine, forward to explore new worlds, then we must now face a more unsettling and more universal question: why do almost all organizations, no matter how glorious, how powerful they once were, seem to be unable to escape the fate of sclerosis, decline, and even extinction?

The answer lies hidden in a force that is completely opposite in direction to the “Expansionary Force,” but is equally powerful and enduring. We name it—the Contractionary Force.

The Contractionary Force is the “brake” and “rust” of the organization, this machine. It is the sum of all the internal forces that hinder growth, corrode efficiency, breed internal friction, and ultimately drag the organization towards its demise. It is not as passionate and dramatic as the “Expansionary Force.” Its mode of action is often silent, cumulative, and imperceptible. It is like the wrinkles of time, the rust of metal, a slow yet irreversible “aging” process.

To understand the essence of the “Contractionary Force,” we cannot just stay on the surface of management and list the symptoms of “big company disease.” We must once again use the weapon of “first principles” to find a more fundamental, universally applicable law. This law is one of the “supreme laws of the universe”—the Second Law of Thermodynamics (the Law of Increasing Entropy).【Note: “Supreme Law of the Universe”: This is not a strict scientific term, but a figurative expression used by many popular science writers and thinkers, such as the British physicist Arthur Eddington, to emphasize the supreme, irrefutable status of the Second Law of Thermodynamics in the scientific field. “Law of Increasing Entropy”: Is a fundamental law of physics. It states that in an isolated system, one that does not exchange energy and matter with its surroundings, the entropy, i.e., the degree of disorder or randomness within the system, will always spontaneously increase over time. In layman’s terms, things will always spontaneously move from a state of order to a state of disorder. For example, a cup of hot water will automatically cool down, but will never automatically heat up; a tidy room, if left unattended, will naturally become messy, but will never become tidy on its own. In this theoretical framework, this law is used as the fundamental explanation for the “Contractionary Force,” i.e., for any organization, if there is no continuous, purposeful energy input (such as management, innovation, etc., which are the “Equilibrium Force” and “Evolutionary Force”), its internal chaos, internal friction, and efficiency decay (i.e., organizational entropy increase) is an unavoidable natural trend.】

1. Chaos is Natural, Order Requires a Price

In the nineteenth century, the German physicist Rudolf Clausius proposed the concept of “entropy”【Note: Entropy: A core concept in thermodynamics, used to measure the degree of disorder or randomness of a system. According to the Second Law of Thermodynamics, in an isolated system, entropy always tends to increase.】 to measure the “disorder” or “randomness” of a system. The Law of Increasing Entropy states that in an isolated system, one that does not exchange energy and matter with its surroundings, the total amount of entropy always increases. In other words, any isolated system will spontaneously and irreversibly move from a relatively “ordered” state to a more “disordered” and “random” state.

This law sounds a bit abstract, but it is everywhere in our daily lives.

Imagine your study, which has just been cleaned to be spotless, with all items placed in an orderly manner. At this moment, this study is in a “low-entropy,” ordered state. The books on the shelf are arranged by author or subject, the desk is dust-free, with only a computer and a lamp, and the stationery is neatly stored in a pen holder. This is a state full of a sense of order, a state that makes one feel calm.

But, as long as you start to live and work in it, and no longer perform any “management” (cleaning and tidying), then an inevitable process will occur: the few books you took out to look up information will be casually piled on the corner of the desk; the draft papers and discarded sticky notes produced during work will be scattered next to the trash can; the finished coffee cup will be left on the desk, leaving a faint ring; the dust in the air will slowly and evenly cover the surface of every object. A few days later, this study will automatically and effortlessly become a “high-entropy,” chaotic state.

What is important is that this process is “spontaneous.” You don’t need to spend any effort to “mess up” the room; it will become messy on its own. Chaos is the “default” trend of this system, its most “comfortable” and “natural” destination.

But on the other hand, if you want to return this already chaotic room to that tidy and orderly “low-entropy” state, you must invest a huge amount of additional “energy.” You must spend an afternoon to wipe the desk, sweep the floor, put the books back on the shelf one by one, and sort and discard the trash. This process of “investing energy to restore a system from disorder to order” is called “entropy reduction.”

2. The Law of Increasing Entropy and the Fate of Organizations

Now, let’s apply this profound physical law to the understanding of an “organization.” An organization, especially when it reaches a certain scale, is also a complex system, with countless independent units (people, departments, processes) inside. Therefore, it also cannot escape the domination of the “Law of Increasing Entropy.”

An organization, in its early entrepreneurial stage, is like that newly cleaned study. It is usually in a miraculous “low-entropy” state. The goals are highly focused, communication is extremely efficient, and actions are exceptionally agile. This is the “golden age” of an organization, an idyllic, ordered state of “low entropy.”

However, as the organization expands, as the “impulse for growth” continuously absorbs more people, more businesses, and more layers into this system, the “Law of Increasing Entropy,” which is as ubiquitous as the cosmic background radiation, begins to quietly exert its powerful and irresistible effect. The once-precise machine of the organization begins to inevitably and spontaneously move towards “rust” and “chaos.”

The “loss of focus” of goals, the “noise” of communication, the “sclerosis” of processes—all these “big company diseases” that we will discuss in depth in subsequent units, their most underlying “pathological” root can be found here in the “Law of Increasing Entropy.”

This is the most essential source of the “Contractionary Force.” It does not originate from the malice of any individual, nor from the negligence of any department. It is an objective, universal natural law, like “objects must fall.” It is the “gravity” within an organization, always trying to pull the organization from that vibrant, ordered “low-entropy” state to a bloated, slow, and friction-filled “high-entropy” state.

Therefore, we can draw a profound, and even somewhat pessimistic, conclusion: for any organization, “chaos” is natural, “order” requires a price; “decline” is spontaneous, “growth” requires every ounce of effort. The “Contractionary Force” is like the Earth’s gravity; it always exists, always pulling us down. And the “Expansionary Force” and “Evolutionary Force” are like the engines of a rocket, which must continuously and enormously consume energy to allow us to temporarily escape the shackles of gravity and fly to a higher sky.

And the entire dignity and value of the art of “management” is, in its essence, a never-ending, life-and-death struggle against this natural law of “organizational entropy increase.” An excellent manager is a tireless “entropy reducer.” He must continuously inject new “negative entropy” into this system to delay, and even locally reverse, the organization’s fate of sliding into the abyss of chaos. By understanding the “Law of Organizational Entropy,” we have obtained the first and most fundamental key to dissecting the complex corpse of “big company disease.”

(2)The “Low-Entropy” State of an Organization: The Idyllic Poem of the Early Entrepreneurial Stage

In the previous section, we introduced the cold, physics-derived “scalpel” of the “Law of Increasing Entropy” and established a slightly pessimistic tone: any organization will inevitably and spontaneously slide into chaos and disorder. However, before we delve into dissecting the frustrating “big company diseases” caused by “entropy increase,” we must first, with an emotion akin to “nostalgia,” look back and remember the miraculous “low-entropy” state, as beautiful as an “idyllic poem,” that every great organization once possessed at the beginning of its life.

This period is the “entrepreneurial stage” of an organization. It is like our newly cleaned study, full of order, vitality, and infinite possibilities. It is the “golden age” of the organization’s “Expansionary Force,” in its purest and most unconstrained form. And understanding the constituent elements of this “low-entropy” state has a critically important “frame of reference” significance for our later diagnosis and confrontation of “entropy increase.”

Among the countless startup loan applications I have reviewed, what I value most is often not their currently still-rough financial statements, but the astonishing “low-entropy” state exhibited by their core teams. Because I know that this state, though brief, contains the most primitive and most precious “vitality,” sufficient to shake the entire industry.

This “low-entropy” state of the early entrepreneurial stage is usually composed of three core “miracles.”

1. The Miracle of Goals: The “Single-Point Focus” of the Entire Team

The first miracle is the miracle of “goals.” A startup organization, its goal is usually extremely singular, extremely clear, and also extremely imbued with a “sense of survival pressure.” It might be “to build our first product within six months,” or “to sign our first ‘lighthouse customer’ that is sufficient for us to survive, before the end of the year.”

This goal, like a “water source” in the desert, is the one and only “hope” for the entire team to see the sun tomorrow. Therefore, it does not need to be “decomposed” and “communicated” layer by layer through a complex KPI system. It naturally possesses a “gravity” that can penetrate everything.

At this stage, there is almost no game of “departmental interests” within the organization. Because there are no real “departments” yet. All members, regardless of their nominal titles of “technology,” “marketing,” or “operations,” have only one common identity—”survivor.”

They are like the “special forces squad” in the movie Saving Private Ryan, sent behind enemy lines to carry out a single mission. In the squad, there are snipers, medics, and demolition experts. But all their “guns” are pointed in the same direction. There are no “departmental walls” between them, only “trenches.”

This “single-minded focus” of the entire team, forced by the pressure of survival, allows the organization’s energy to be invested, in an almost “zero-friction,” extremely pure way, one hundred percent, on that one and only, life-or-death “breakthrough point.”

2. The Miracle of Communication: The “Zero-Latency” Flow of Information

The second miracle is the miracle of “communication.” A typical startup team is often squeezed into a small, and even somewhat messy, office or garage. This, in physical space, determines that its communication cost is almost zero.

The transmission of information no longer needs to go through the “CC chain” of emails or cross-departmental “coordination meetings.” It only requires a “turn of the head,” a “shout,” or an “impromptu discussion” in front of a whiteboard for a few words.

I once went to a fintech startup company we had invested in, a company with only seven people, for a post-loan inspection. Their “office” was a large open space. The founder and all the engineers and designers sat together. I sat there, and in just one hour, I witnessed at least three extremely valuable “emergence” moments.

A designer responsible for user experience encountered a technical question while drawing a prototype. She didn’t send an email, but directly shouted to the “backend engineer” on the other side of the room. The engineer came over, looked at it for five minutes, and gave a more concise and easier-to-implement technical solution.

A young person in charge of marketing had just received a tricky piece of feedback from a potential customer. He didn’t write a report, but directly walked to the founder’s desk and repeated the customer’s original words. The founder immediately gathered everyone for a “stand-up meeting” that lasted no more than ten minutes. They decided on the spot to make an urgent “micro-adjustment” to a certain function of the product.

Friends, this “zero-latency” flow of information, this “immediacy” of decision-making, for a startup organization, is its most core “secret weapon” for maintaining “agility” in a rapidly changing market. The entire organization is like a “super-brain” with no “synaptic delay” between its “neurons.” There is almost a “seamless” connection between thought and action.

3. The Miracle of Action: “Rough” but “Rapid” Iteration

The third miracle is the miracle of “action.” A “low-entropy” startup organization is naturally immune to all the “big company diseases” we have discussed before.

It has no “shackles” of “process.” Because there has been no time to formulate any tedious processes. Its “only process” is “to get things done as quickly as possible.”

It also has no “fear” of “failure.” Because it has nothing to lose. Every “trial and error,” for it, is not “losing” anything, but “gaining” precious “cognition.”

This allows it to, at an astonishing speed that makes all mature organizations both “envious” and “fearful,” carry out “rapid iteration.” Its product may be “rough,” its model may be “naive,” but it is like a “baby” that constantly falls and gets up again. Its “learning” speed is exponential.

A mature organization, on the other hand, is like an “adult” in a suit and tie. Every step he takes, he has to weigh it repeatedly, for fear of getting his “leather shoes” dirty, or ruining his “elegant” “image.”

Lao Tzu said: “Manifest plainness, embrace simplicity, reduce selfishness, have few desires.”【Note: From Chapter 19 of the Laozi (or Tao Te Ching). The meaning is: to show a simple nature, to maintain a plain essence, to reduce selfishness, and to lower desires. Here, it is used as an analogy for the “low-entropy” state of the early entrepreneurial stage, which is characterized by pure goals, a simple organization, and a lack of complex internal interest conflicts.】 This sentence is precisely the most incisive “philosophical” summary of this “low-entropy” state of an organization in its “early entrepreneurial stage.”

“Manifest plainness, embrace simplicity” refers to the high “purity” and “singularity” of the goal. “Reduce selfishness, have few desires” refers to the lack of complex “departmental interest” “games.”

This is the most “innocent” and most “beautiful” “idyllic poem” era in an organization’s life. However, just as our own “childhood” is destined to pass, this beautiful “low-entropy” time is also bound to be gradually eroded and replaced in the inevitable “growth” process of the organization’s “scale expansion.”

(3)Scale Expansion and Entropy Increase: Loss of Focus, Communication Noise, and Process Sclerosis

After we have jointly savored the “low-entropy” idyllic poem of an organization’s “early entrepreneurial stage,” which was full of miracles, we must face an inevitable process that is both exciting and painful, just like “growth” itself. This process is “scale expansion.” And it is precisely in this great and difficult evolution, from a “small and beautiful” guerrilla force to a “large and strong” regular army, that “entropy increase,” the ghost we have discussed before, as ubiquitous as the cosmic background radiation, begins to quietly invade every cell of our organization in an almost fateful way.

Scale is the fruit of victory for an organization’s “Expansionary Force,” but it is also the most fertile breeding ground for the “Contractionary Force.” The inevitable price an organization must pay on its path to scale is the unavoidable increase of its internal “entropy.” This tragedy of entropy increase usually unfolds before our eyes in a “three-act play.”

Act I is the “loss of focus” of goals, a strategic navigational confusion from “single-point breakthrough” to “multi-front warfare.” When our startup organization, with its low-entropy vitality, has successfully torn an opening in the market and won its first customers and revenue, a new world full of temptations unfolds before us. We will find that around this small success, countless new possibilities begin to emerge. Our first customer might suggest adding feature A; our investors might urge us to replicate the model in fields B and C; and the engineers within our team might also propose to solve problems in field D.

When the pressure of survival is initially alleviated, the single-point goal, which was once as clear and unique as the North Star, begins to be surrounded and interfered with by countless new stars that are equally shining with tempting light. The organization’s Expansionary Force begins to transform from a focused energy into a divergent one. And this is the first dangerous signal of goal entropy increase. A leader who is not firm enough or is intoxicated by initial success can easily get lost in this feast of possibilities. He will try to seize every opportunity.

Thus, we see the most classic tragedy that has been repeatedly staged in business history: an organization that should have invested all its limited resources to deepen the main well that had just struck water, has mistakenly dispersed its precious troops to simultaneously dig ten new pits of varying depths. The final result is often that every new pit is only scratched on the surface and cannot produce water, while the main well, which could have become a century-old well, is also easily surpassed by later, more focused competitors due to a lack of continuous investment and maintenance. As Sun Tzu’s Art of War says: “If the place where we are to fight is not known, then the enemy will have to prepare in many places. And when the enemy has to prepare in many places, the forces we have to fight in any one place will be few.”【Note: From the “Weak Points and Strong” chapter of Sun Tzu’s Art of War. The meaning is: if our army’s operational intentions are not known to the enemy, then the enemy will have to prepare in many places. And when the enemy has to prepare in many places, the enemy forces we have to face in our main attack direction will be few. Here, it is used as an analogy for the fact that if an organization has too many goals and its front line is too long, it will lead to the inability to form an overwhelming advantage at any single point.】 The loss of focus is precisely such a self-consuming act in strategy. It makes an organization degenerate from a fist that can form a combined force into a bunch of fingers that cannot be clenched.

Act II is the “noise” of communication, a tragedy that occurs when “rapport” is replaced by “process.” When an organization inevitably grows from a small workshop squeezed into the same office into a large company with hundreds of employees, distributed on different floors or even in different cities, the second act of entropy increase begins. The protagonist of this act is communication. We have already calculated from a mathematical perspective how, when the number of people in an organization grows from ten to one hundred, the number of internal communication channels will explode from forty-five to nearly five thousand. This explosion in quantity is bound to bring a catastrophic decline in quality.

The rapport that was once as efficient and precise as telepathy disappears, replaced by a complex bureaucratic communication system full of noise, delay, and misunderstanding. Information is no longer transmitted through face-to-face, high-fidelity dialogue; it begins to be broadcast asynchronously and in low-fidelity through cold emails full of CCs and BCCs. Decisions are no longer emerged through an impromptu discussion in front of a whiteboard; they begin to require a series of cross-departmental coordination meetings with numerous participants, vague agendas, and often unable to form any effective conclusions.

The cost of this internal friction, caused by communication entropy increase, is astonishing. It is like an invisible tax collector, constantly levying a high time tax and mental energy tax on us. It makes the organization’s nervous system increasingly sluggish. An important piece of intelligence from the front lines of the market, concerning life and death, may need to travel for weeks in the organization’s bureaucratic labyrinth to reach the brain. And when it finally arrives, the battlefield has long since been cleaned up.

Act III is the “sclerosis” of processes, the ultimate tragedy that occurs when the “Equilibrium Force” strangles the “Evolutionary Force.” When goals have lost focus and communication is full of noise, in order to combat this growing chaos, the Equilibrium Force will make a grand entrance in the guise of a savior. The organization’s managers will begin to dedicate themselves to building a seemingly scientific and rigorous set of rules and approval processes. They try to use this deterministic shackle to re-lock the organizational beast that is sliding out of control. This is necessary in the early stages; it brings order to chaos.

But the devil of entropy increase is precisely hidden in this over-obsession with order. Over time, the process will gradually degenerate from a tool that helps the organization to operate efficiently into a bureaucratic monster that exists for its own sake. A promising innovation project is no longer evaluated on its own merits. It first needs to go through a lengthy project approval process that includes dozens of approval nodes. And the approver at each node often does not care whether this project can create value for the company’s future; what he cares about is whether this project will bring extra workload to his own department, or whether it will challenge his existing power and territory.

Friends, you see, this Equilibrium Force system, which was supposed to serve the organization, often ultimately degenerates into the most powerful Contractionary Force that strangles the organization’s Evolutionary Force. It will make the organization better and better at repeating the successes of yesterday that have been solidified by processes. But it will also at the same time make the organization completely lose the ability to explore the possibilities of tomorrow that cannot be defined by processes.

Loss of focus, communication noise, and process sclerosis. This is the inevitable tragic trilogy of scale expansion. It is the unavoidable growing pains of all organizations from youth to middle age, and also the first and most stubborn poisonous weeds that the Contractionary Force has planted within our organization.

II. The Cost of Communication: The Out-of-Sync Chantey and the Establishment of Departmental Walls

(1)The Exponential Growth of Communication Channels: A Look at Complexity Through a Mathematical Model

If the “Law of Organizational Entropy” is the macroscopic “physical” law for us to understand organizational decline, then the runaway cost of communication is the most concrete, most universal, and most destructive “chemical” manifestation of this law within the organization. The vitality of an organization, to a large extent, depends on the efficiency of its internal information flow. Information is the “blood” of the organization; communication is the “blood vessel” that transports the blood. When the blood vessels begin to harden and become blocked, the body of the organization, no matter how strong it once was, will inevitably move towards necrosis and decay. And the initial, and most fundamental, pathological root of this “vascular sclerosis” tragedy comes from a seemingly simple yet extremely cruel mathematical reality—the exponential growth of communication channels.

To intuitively understand this explosion of complexity, we do not need complex management theories, but only a very simple yet extremely persuasive mathematical model. This model comes from network science, and it calculates the number of possible paths for pairwise connections between all nodes in a network. Its formula is: C equals N times (N minus one) divided by two, where N represents the number of people in the organization, and C represents the number of potential communication channels.【Note: Communication Channel: In organizational theory, refers to the path through which information is transmitted between different individuals or departments. Its quantity and efficiency are important indicators for measuring the complexity of organizational communication.】

Let’s take a look at how this beast named “complexity” grows at a non-linear, dizzying speed when the number of people in an organization changes.

In an organization of only 2 people, for example, a couple who have just started a business, N equals 2, and there is only 1 communication channel. Information can be transmitted between them with almost no loss and zero latency.

In a startup team of 5 people, N equals 5, and the number of communication channels rises to 10. This is still a manageable scope, and the team members can maintain information synchronization through high-frequency, face-to-face communication.

When the size of an organization expands to 50 people, which is the size of a small to medium-sized department, N equals 50, and the number of potential communication channels will soar to an astonishing number: 1,225.

And when an organization grows into a medium-sized company with 500 employees, this number will reach an astronomical level that we can hardly imagine: 124,750.

Friends, please carefully feel the terrifying power of “organizational entropy increase” hidden behind this number. It means that, in order to achieve perfect information flow within the organization, in theory, we need to simultaneously manage more than one hundred and twenty thousand “communication pipelines” where information transmission can occur at any time, and information blockage can also occur at any time. This is an “impossible task” in reality.

And this is just a theoretical calculation. In a real organization, the situation is much more complex. Because communication is never a simple “information transmission” process. It is a “signal attenuation”【Note: Signal Attenuation: A term originating from communication engineering, which refers to the gradual weakening of the strength and quality of a signal during transmission due to factors such as distance and interference. Here, it is used as an analogy for the distortion and loss of information as it is transmitted through the organizational hierarchy.】 process, full of “entropy increase,” and extremely prone to loss and distortion. Every time information is transmitted, it will undergo a slight “deformation” due to the transmitter’s personal understanding, interest position, and the limitations of language expression. And when a piece of information needs to travel through a long “communication chain” composed of ten “nodes” (people), its appearance, when it reaches the end, may already be vastly different from what it was at the beginning.

The banking industry, where I have worked, is a typical industry deeply plagued by this “curse of communication complexity.” The organizational structure of a large bank is like a huge “Russian doll.” Under the head office, there are branches; under the branches, there are sub-branches; and under the sub-branches, there are outlets. And each level is horizontally divided into dozens of functional departments such as front office, middle office, and back office.

Imagine, how can a strategic intent from the highest decision-making level of the head office, about “comprehensively promoting green credit,” be transmitted, without discount, to the ears of the most grassroots account manager in a remote county sub-branch?

This “intent” will first be transformed by the head office’s strategic planning department into a “guideline” that is dozens of pages long and full of macroeconomic data and professional jargon. Then, this “guideline” will be sent down to the directors of various business departments through the internal office system. The directors will call their subordinates for a meeting to “study the spirit of the document” and translate it into more specific “action plans” for their departments. Then, these “action plans” are sent down to the various branches. The branch presidents will then call the sub-branch presidents for “re-transmission” and “re-deployment.”

Friends, in this long, top-down “information waterfall,” the original “living water,” full of strategic foresight, after being “re-translated,” “filtered,” and “bureaucratized” by layers of “pollution,” when it finally reaches the ears of that grassroots account manager, it may have been reduced to a simple and cold “directive”: “Starting from the next quarter, loans to the green industry must account for more than 30% of all your new loans, otherwise your performance bonus will be deducted.”

The original “soul” of “why” has disappeared. What remains is just a “shell” of “how,” full of indicator pressure.

This exponential growth of “communication channels” and the exponential decay of “information transmission” quality, caused by the expansion of organizational scale, are the most direct and most unavoidable “physical” consequences of organizational “entropy increase.” It is like an invisible but increasingly heavy “shackle,” constantly increasing the organization’s “internal friction cost,” reducing its “reaction speed,” and ultimately providing the most fertile and most dangerous “soil” for the breeding of the “organizational cancer” named “departmental walls,” which we will discuss next.

(2)The Threefold Construction of “Departmental Walls”: The Barriers of Physics, Language, and Interest

Friends, after we have jointly witnessed how communication channels explode exponentially with the expansion of organizational scale, we have arrived at the second, and more structural, act of the tragedy of organizational “entropy increase.” When thousands or even hundreds of thousands of communication pipelines are crisscrossing within a huge organization, in order to combat this unmanageable chaos, the organization’s “Equilibrium Force” will instinctively intervene. It will try to re-sort and re-plan the flow of information in a seemingly rational way, and the product of this planning is the existence that we are all very familiar with in all large organizations today—the department.

The birth of departments is undoubtedly well-intentioned and scientific in its original purpose. It follows the core idea of Adam Smith’s “division of labor,” attempting to break down the complex overall tasks of an organization into specialized units with clear functions and responsibilities, in order to improve the overall efficiency of the organization. We gather the people responsible for sales and call them the marketing department, gather the people responsible for R&D and call them the technology department, and gather the people responsible for risk control and call them the risk control department. This is, in theory, a perfect, rational design based on professionalism.

However, friends, an organization is never a purely rational system; it is more of a social system full of humanity and tribal instincts. When a group of people with a common professional background, pursuing common KPIs, and spending their days and nights together are physically gathered in the container of a department, a powerful, ancient sense of tribal identity will inevitably and spontaneously grow. Thus, the invisible dotted line that was originally just to demarcate functions begins to be laid with real bricks, one by one, under the irrigation of the tribal consciousness of “us” versus “them,” and eventually evolves into high, solid “departmental walls” that obstruct the flow of information and trust. The construction of this wall is not accomplished overnight; it is formed by the superposition and mutual reinforcement of three layers of bricks of different materials.

The first layer of bricks is the “physical wall,” that is, the isolation of space and time. This is the most basic and most easily perceived wall. In a large organization, different departments are often located on different floors, in different office buildings, or even in different cities. A trader in the financial markets department at the head office in Beijing and an account manager responsible for SME loans at the Guangzhou branch are separated by a physical distance of two thousand kilometers. This physical isolation is the starting point of all communication barriers. It first of all completely eliminates the possibility of the informal communication that is crucial for sparking innovation and trust.

The research of the management guru Thomas Allen has long revealed this cruel reality to us through the famous “Allen curve.”【Note: Allen Curve: A pattern discovered through empirical research by the MIT professor Thomas Allen, which states that the frequency of effective communication between two people is inversely proportional to the square of their physical distance. When the distance exceeds a certain threshold (e.g., 50 meters), the probability of them having a spontaneous technical exchange will drop sharply, approaching zero.】 The physical distance between two people is the strongest predictor of whether they can have a spontaneous technical exchange. The greatest, most disruptive ideas are often not born in formal, agenda-driven meeting rooms; they are often born in the “third spaces” full of randomness and chance encounters—a casual chat while waiting for coffee at the water cooler, a chance meeting while queuing for lunch in the cafeteria, a brief exchange in the elevator after work.

However, when the “physical wall” is established, all the precious soil that allows the cross-pollination of knowledge and inspiration from different fields is completely eradicated. The colleagues in the marketing department can no longer hear the passionate complaints of the engineers in the R&D department about a certain new technology in private, and the engineers in the R&D department can no longer, from the idle chat of their sales colleagues, capture the fleeting spark of inspiration about a real customer pain point. This wall makes accidental encounters within the organization impossible, and thus strangles a large number of opportunities for emergent innovation at the root.

The second layer of bricks is the “language wall,” that is, the information silo of cognition and thinking. If the physical wall separates our bodies, then the language wall digs a deeper and more insurmountable cognitive chasm between our minds. The language here refers not to Chinese or English, but to the unique set of jargon or terminology of each department, each professional field. This jargon is an inevitable product of professional specialization. It can greatly improve the efficiency and precision of communication within a department, but at the same time, it acts like a double-edged sword, building a modern organization’s information silo between departments.

The colleagues in the IT department are full of talk about agile, iteration, API interfaces; the colleagues in the risk management department are immersed in the world of the Basel Accords, VaR models, and stress testing; and the colleagues in the marketing department are talking about user personas, private traffic, and brand-performance integration. When this group of people, speaking different languages, sit in a meeting room trying to discuss the same project, a modern organizational tragedy unfolds. The business department will complain that the IT department doesn’t understand the business and the systems they develop are anti-human. The IT department will complain that the business department’s requirements are constantly changing and their logic is chaotic and impossible to implement. The risk department will think that both of them are fooling around and have not considered the bottom line of compliance and risk at all. A meeting that was supposed to be a collaboration ultimately degenerates into a blame game of mutual accusation and shirking of responsibility. Everyone is talking, but it seems no one understands anyone.

Behind this language barrier is a deeper difference in mental models. A finance person, his underlying code for viewing the world is cost and benefit; an engineer, his underlying code is logic and implementation; and a designer, his underlying code is aesthetics and experience. When an organization cannot establish a common language that can cross these professional barriers, it is like a giant with multiple brains, but these brains cannot synchronize their neural signals, a giant with schizophrenia.

The third layer of bricks, and the most solid, most fatal one, is the “interest wall,” that is, the tribal warfare driven by KPIs. When the physical and language walls have already divided different departments into independent tribes, the wall of interest, driven by the KPI assessment system, will finally solidify the estrangement between these tribes into an unshakeable hostility. Every department has its own independent KPI assessment indicators, its own departmental abacus. This wall is no longer about not understanding, but about not wanting to listen. It alienates communication from a simple information exchange process into one silent departmental interest game after another.

I have personally experienced such an event. At that time, the credit approval department I was in charge of found that the systemic risk of a certain industry, such as the downstream module factories of the photovoltaic industry, was accumulating rapidly, and the default rate was rising significantly. We immediately drafted a risk warning report, recommending that the entire bank immediately tighten credit lending to this industry and conduct a risk screening of existing customers. This report was sent to the retail banking department and the corporate banking department, the two front-line departments responsible for business expansion. However, the report was like a stone dropped into the sea, and for a long time, it did not receive the due attention and feedback. Why? Because for these two departments, a considerable part of their performance indicators for that year needed to be completed by lending to this industry. If credit were to be tightened across the board at this time, it would mean that it would be almost impossible for them to achieve their annual profit targets, and the year-end bonuses of the entire department, from top to bottom, would be gone.

And so, a silent departmental war began. The colleagues in the front-line departments began to selectively submit information to us. They would do their best to embellish the highlights of a certain customer, such as having received new orders or having a new patent, but would brush over the key risk signals such as the customer’s continuously lengthening accounts receivable cycle and increasingly tight cash flow, and even conceal them. And our approval department was forced to adopt a presumption of guilt mode, treating every report from the front line with suspicion and conducting double, and more tedious, due diligence. What was the final result? It was that both sides invested huge, additional communication costs and internal friction costs. The entire bank was like a person fighting with his left and right hands, consuming precious energy and time on the spot. What was more terrible was that due to the obstruction of communication and the delay of decisions, when our head office finally made up its mind to forcibly implement the credit tightening policy, the risks in the industry had already fully erupted. Although we avoided greater losses, we still paid the painful price of hundreds of millions of yuan in non-performing loans for this internal war.

The physical wall, the language wall, the interest wall—these three walls together build the communication barrier of a modern organization. It causes a serious embolism in the nervous system of the organization, this machine. Information cannot flow smoothly from the nerve endings, i.e., the front-line market, to the brain, i.e., the decision-making level; and the commands issued by the brain cannot be accurately and without discount implemented in the limbs, i.e., the executive departments. The final result is a sharp increase in the organization’s entropy, and the organization begins to become increasingly dull and numb to changes in the external environment. It becomes a huge, slow-reacting dinosaur. Even if it sees a meteorite, that is, a disruptive technology or competitor, rushing towards it from a distance, because the speed of nerve signal transmission within its body is too slow, it cannot make an effective evasive action in time. This is the fatal aspect of the powerful Contractionary Force of communication cost. It will not, like a powerful enemy, defeat the organization in one fell swoop from the front. It will only, like a chronic, ever-worsening arthritis, slowly erode every joint of the organization, making its every movement extremely painful, stiff, and slow, until it finally completely loses its ability to move and collapses in a constantly changing environment.

(3)An Internal Banking Case Study: A Personal Experience of Cross-Departmental Friction

Friends, theoretical discussions are like war games on a sandbox; they can certainly allow us to perceive the laws of war. But only by personally experiencing a real, fire-and-brimstone battle can we truly and viscerally feel the cruel and powerful force that those laws exhibit in the real world. In the previous section, we jointly dissected how the “stubborn disease” of the modern organization, the “departmental wall,” is constructed from the three hard layers of physics, language, and interest. Now, I will no longer cite any external cases, but will open my own memory archive to take you back to a costly “internal war” that I personally participated in and commanded. This war had no enemies, but the “internal friction” and “losses” it caused were no less than any external market shock. It is the most vivid and most alarming footnote to the powerful “Contractionary Force” of “departmental walls” in the real world.

The story takes place during my tenure as the general manager of the credit department at the head office of a national joint-stock bank, about a decade ago. It was a complex period when the Chinese economy was still in a phase of high-speed growth, but some emerging industries had already begun to show signs of “overheating.” At that time, the green energy industry, represented by solar photovoltaics, was in the spotlight. Not only did it have strong support from national policies, but it was also hailed by the capital market as the “golden track” representing the future. Our bank also listed it as a key area for credit lending for the year.

And so, a typical “credit great leap forward,” driven by the “Expansionary Force,” began. Our corporate finance department, which was responsible for market expansion, like a wolf pack that had smelled blood, plunged into the competition for photovoltaic industry chain customers with unprecedented enthusiasm. The projects they brought back all painted a heart-stirring blueprint: this company has just won a several-hundred-megawatt power station project from a certain local government; that company has developed a new generation of battery cells with a conversion efficiency that leads the industry. Their loan application reports were written voluminously, full of optimistic expectations for the bright future of the industry.

However, as the bank’s “last line of defense,” my credit approval department smelled an increasingly strong scent of danger from these seemingly glamorous reports and the industry data we independently obtained. Our “risk radar” began to sound the alarm. We saw that due to the large influx of capital, the entire industry was experiencing serious overcapacity; in order to snatch orders, the price war between enterprises had entered a white-hot stage, causing the gross profit margin of the entire industry to be sharply compressed; more fatally, due to a high dependence on government subsidies, the accounts receivable cycle of these enterprises was infinitely lengthened. Although many companies looked “profitable” on their income statements, their cash flow statements were already in a state of “hemorrhage.”

And so, a classic internal war, centered on the “departmental wall,” inevitably broke out.

The first stage of the war was the “trenches of language” and “cognitive divides.” When we, in the credit review meeting, raised our concerns about “cash flow risk” and “accounts receivable” to our colleagues in the corporate finance department, what we often got was a response that was almost like “a chicken talking to a duck.” They would pull out thick industry analysis reports to argue how huge the long-term growth potential of this industry was; they would pull out the company’s latest patent certificates to prove how solid the company’s technological barriers were. They were speaking the language of the “Expansionary Force”—about the future, about growth, about dreams. And we were speaking the language of the “Contractionary Force” and the “Equilibrium Force”—about the present, about risks, about the cold, hard financial data that could cause a company to die on the eve of dawn. Both sides, we were all professionally trained and believed we were acting in the bank’s best interests. But our “mental models” for viewing the same world were completely different. This “language wall” made the initial communication full of frustration.

The second stage of the war was the “barriers of interest” and the “filtering of information.” When the colleagues in the corporate finance department found that they could not “logically” persuade us “stubborn” risk officers, a more hidden game began. Because their annual KPIs and huge bonuses were directly linked to the “scale of lending.” And our KPIs were closely linked to the “asset quality” and “non-performing loan ratio” of the entire bank. This “structural opposition” of KPIs quietly transformed us from “partners” into “interest opponents.”

And so, we began to feel the most terrible consequence of the “interest wall”—the “selective” presentation of information. The due diligence reports we received became more and more like “marketing proposals.” The reports would use a large amount of space to describe how exciting the new orders the company had received were, but would brush over the accounts receivable that had been overdue for half a year. The reports would attach the company’s glamorous promotional brochures, but would, on the grounds of “customer privacy,” delay in every possible way the detailed bank statements that could reflect its true financial situation, which we had repeatedly requested.

This “information war” greatly increased our work costs. Unable to fully trust the information provided by the front office, our credit approval department was forced to “evolve” into a small “internal intelligence agency.” We had to bypass the account managers and, through various informal channels, such as talking to the company’s suppliers and even its competitors, to piece together a more authentic picture of the company’s operations from the side. This “redundant construction” and “waste of resources,” caused by internal distrust, was the greatest erosion of organizational efficiency.

The final stage of the war was the entire organization’s “decision-making paralysis” and “risk accumulation.” In this protracted “internal tug-of-war,” time was wasted in vain. Many truly high-quality, risk-controllable projects might have missed their best lending window due to our overly cautious and lengthy investigation. And some other high-risk projects, which had been “packaged” by the front-office departments in various ways, might have eventually been approved “with illness” due to higher-level intervention from “performance pressure.”

The final outcome was that everyone lost. When the subsidy policy for the photovoltaic industry suddenly changed significantly and the entire industry instantly “entered winter,” our bank became one of the “last bag holders.” The price we paid for this internal war was ultimately up to several hundred million yuan in non-performing loans. This huge tuition fee was not paid to any powerful external competitor, but was completely consumed by the huge “internal friction” created by our own three high, solid “departmental walls.” This is the truest and most expensive destructive power of the Contractionary Force of “communication cost.”

III. The Innovator’s Dilemma: When Processes Stifle Individual Vitality

(1)The “Chief Risk Officer’s Nightmare” Thought Experiment

Friends, after we have jointly witnessed the cold “communication barrier” constructed by “departmental walls,” we must turn our surgical knife to the deeper and more tragic “heartland” of the organization’s “Contractionary Force.” Here, we will explore one of the most perplexing and most regrettable paradoxes in business history: why do the organizations that have achieved great success through disruptive innovation often, after they mature, become the coldest executioners that strangle the next generation of disruptive innovation?

This paradox was most classically described by the Harvard Business School professor Clayton M. Christensen in his deafening work, The Innovator’s Dilemma.【Note: The Innovator’s Dilemma: A management classic published by Clayton M. Christensen in 1997. The book systematically elaborates the theory of “disruptive innovation,” profoundly explaining why well-managed, successful large companies often lose their market leadership when faced with disruptive technologies.】 Christensen astutely pointed out that the failure of many excellent companies was not because they “did something wrong”; on the contrary, it was because they did all the “right” things “too well.” They listened carefully to the opinions of their mainstream customers, they invested resources in their most profitable product lines, and they strictly conducted market research and financial calculations. And it was precisely these “best management practices,” which are revered as gospel in business school textbooks, that ultimately led them to the cliff of disruption.

The killer is not a certain person or a certain department, but the entire powerful “Equilibrium Force” system that the organization has established in its fight against “entropy increase” and its pursuit of stability and order—especially, the rational decision-making mechanism centered on “processes” and “financial metrics.” This mechanism is an efficient “booster” when faced with sustaining innovation, but when faced with disruptive innovation, it instantly turns into a cold “crusher.”

To allow everyone to immersively feel how this “tragedy” is staged day after day around us, let’s enter a thought experiment together, which I call the “Chief Risk Officer’s Nightmare.”

Please imagine that you are the chief risk officer of a mature smartphone giant with an annual profit of tens of billions of dollars. Your core duty is to use all your professional knowledge and the power granted to you by the company to defend the company’s profits and market position, and to avoid all risks that may cause it harm. Your career is a never-ending war against “uncertainty.”

One day, a small “innovation incubator” team within the company submits a new project proposal to you and the company’s investment decision committee. This team is composed of a few passionate recent graduates. Their plan is not to develop a new phone with a larger screen, a faster chip, or a better camera that can be sold for six thousand yuan. On the contrary, they want to make an extremely “simple” product.

This is a small, “conversational badge” with an AI assistant that can be pinned to the collar. It has no screen, and almost all interactions are done through voice. Its functions are also very simple; it can only be used to make calls, send messages, check the weather, and play music. Its target customers are not the business people who pursue top performance, but the “lazy people” who want to free their hands in specific scenarios (such as running, driving, or cooking), or the elderly who are afraid of complex smartphones.

Now, as the chief risk officer, you need to evaluate this project from a professional, rational perspective. Your brain will immediately activate the mature “risk assessment process” that has long been internalized as your thinking instinct, and one by one, you will ask the team the most fatal and most unavoidable questions.

Step 1 is market size assessment. You ask: “How big is the market for this ‘conversational badge’?” The team leader can only honestly answer: “We are not sure. This is a new category, and there is no comparable data on the market at present. We just feel that this may be a potential need.” For you, who are used to hearing grand narratives like “ten-billion-dollar market” and “hundred-billion-dollar track,” this “uncertain” answer is almost equivalent to “non-existent.” The first danger signal lights up in your mind.

Step 2 is customer demand validation. You ask: “Will our mainstream customers—the ones who are willing to spend six thousand yuan on our latest phone—buy this thing?” The team answers: “Most likely not. What they need is powerful performance and a high-definition screen, and our product is ‘negative’ in both these aspects.” The second danger signal lights up. This project not only fails to serve our highest-quality customer group, but may even, due to its “simple” image, damage our hard-won high-end brand positioning.

Step 3 is financial model calculation. You ask: “What is the expected profit margin of this project? How long is the investment return period?” The team members, after some hemming and hawing, present an extremely ugly financial forecast. Due to the need to invest a large amount of R&D funds in the early stage to overcome the difficulties of voice recognition and AI algorithms, and its extremely limited early user scale, it is expected that this product will be in a state of continuous, huge losses for the next three to five years. Its expected profit margin may not even be one-tenth of the company’s mainstream mobile phone business.

The nightmare has arrived. As a rational chief risk officer who is responsible to the shareholders, your conclusion is almost the only, unshakeable one: this is a “three-no” project with an unknown market size, an unclear target customer, and an unclear profit model. Its risks are extremely high, while its visible, quantifiable returns are minimal. Investing the company’s precious funds and smartest engineers in such a project is extremely irresponsible to the shareholders. From any mature business decision-making model, this project should be “shot” immediately.

And this is the cruelest reality of the “innovator’s dilemma.”

The “Equilibrium Force” system, established to manage a huge business and ensure stable growth—the rational market analysis process, the strict financial return requirements, the value orientation of serving mainstream customers—is like a “sieve” made of high-strength alloy with an extremely fine mesh. This sieve can very efficiently filter out the immature, unreliable, and risky bad ideas. But the price is that, while filtering out ninety-nine percent of the gravel, it also filters out the one percent of “disruptive innovation” seeds, which are wrapped in a rough shell but may grow into towering trees in the future.

Organizational “entropy increase,” here, is manifested as a “cognitive laziness” and a “process inertia.” Because to evaluate a sustaining innovation project (for example, to make the phone battery 10% larger) is simple and comfortable. It has clear data to analyze, mature models to apply, and the risk of the decision is very low. But to evaluate a disruptive innovation project is difficult and painful. It requires the decision-maker to jump out of all familiar frameworks, to embrace uncertainty, and to make judgments with imagination rather than a calculator. This requires huge cognitive energy and the courage to take risks.

In the face of the powerful “process inertia” that pursues certainty, the “innovative vitality” of individuals appears so fragile. The passion of those young people, after one tedious report writing after another, one questioning review meeting after another, their initial flame will be gradually extinguished by the endless processes and the cold financial figures. They are ultimately left with only two choices: either, give up their ideas and engage in the “sustaining” work that is easier to get approved and more easily rewarded, becoming a compliant screw on this precision machine; or, leave with their ideas and start a new company, a company with nothing but also no constraints, and pray that one day they can become the “meteorite” that disrupts their old employer.

This is the internal mechanism by which the “Contractionary Force” strangles the “Evolutionary Force.” It is not a blatant murder, but a protracted “institutional strangulation” in the name of “rationality” and “process.” It profoundly explains why great enterprises are often not defeated by more powerful opponents, but are trapped and killed by their own “successful system,” which they were once proud of but has now become rigid and bloated. The “entropy increase” of an organization is ultimately manifested in the “entropy increase” of its “cognition.” It loses the ability to understand and embrace new things, and slowly waits to be eliminated by history in the comfort zone it has drawn for itself.

(2)The “Cognitive Laziness” and “Institutional Strangulation” of Process Inertia

Friends, in the unsettling thought experiment we just conducted, we played the role of the “chief risk officer” who strangled the light of the future. We found that our every decision was incredibly “rational,” incredibly “correct,” and fully in line with our code of conduct as a qualified professional manager. However, it was precisely the collection of these locally optimal “correct” decisions that ultimately led to a catastrophic “error” in the overall strategy.

This “rational irrationality” is the most profound and most alarming paradox in business history. It forces us to ask a deeper question: what kind of powerful force can systematically and continuously cause the hundreds or thousands of brilliant minds in an organization to collectively fall into a “cognitive laziness” and ultimately activate the cold “strangulation” machine named “institution”?

The answer lies hidden in the innate “double-edged sword” effect of the organization’s “Equilibrium Force.” An organization, in order to combat entropy increase and achieve scalable, stable operations, the powerful “process” and “value” system it establishes, while bringing it great success, will also inevitably form a powerful “inertia.” And this inertia is precisely the most fundamental “structural” force that strangles disruptive innovation. Clayton M. Christensen accurately summarized this powerful inertia into two core elements: the value network and the resource allocation process.

The first culprit is the invisible gravity of the “value network.”【Note: Value Network: A core concept in Christensen’s theory, which refers to the specific context in which an enterprise identifies and responds to customer needs, solves problems, acquires resources, deals with competitors, and pursues profits. A company’s value network determines what it considers “valuable” and what it considers “valueless.”】 A mature enterprise does not exist in a vacuum. It is deeply embedded in a complex “value network” jointly composed of its mainstream customers, core suppliers, distribution channels, and investors. In this network, the interests of all participants are deeply bound around the main channel of “sustaining innovation.”

Let’s return to the example of the “conversational badge.” When the smartphone giant consulted its most important “mainstream customers”—the large corporate procurement departments and telecom operators—what kind of feedback would they get? They would say: “This thing with no screen and weak performance is useless to us. What we need is the next-generation smartphone that can better handle our corporate email system and has a higher security level.” When it consulted its “core suppliers”—such as the screen manufacturers and chip design companies—they would be equally confused. Because this new product does not use their most advanced and most expensive components at all. Even when it consulted the “investors” on Wall Street, the analysts would mercilessly mark this project, which had no profit prospects in sight, as a huge “risk item” in their valuation models.

Friends, you see, the entire “value network” is like a powerful “gravitational field.” Through the continuous “negative feedback” from every key stakeholder, it mercilessly and irresistibly pulls the enterprise that is trying to explore disruptively back to the “sustaining innovation” track, which is crowded but has been proven by everyone to be “correct” and “profitable.” In this gravitational field, any attempt to “go against the grain” is seen as a betrayal of the “collective interests” of the entire value network.

The second culprit is the institutional bias of the “resource allocation process.” A mature organization, in order to ensure that its limited resources (capital and talent) are allocated to the projects with the highest rate of return, will inevitably establish a complex “resource allocation” process centered on “data” and “financial models.” This is a manifestation of the “Equilibrium Force,” the cornerstone of organizational rationality. However, this process, which is born for “certainty,” will instantly become the coldest “killer” when faced with “uncertainty.”

A disruptive innovation project, in the early stages of its life, all its “financial metrics” are extremely “ugly.” Its market size is unknown, so any forecast of future sales seems like a fantasy. Its technological path is uncertain, so its R&D cost and cycle are difficult to estimate accurately. Its profit margin is meager, or even negative. When such an “ugly” baby, together with the “strong,” “mature projects” from the mainstream business, stand before the organization’s “resource allocation committee” to compete for the next year’s “budget,” the result is without suspense.

I have personally witnessed, within the bank where I worked, how an innovative project, passionately proposed by a few young people, aimed at providing “small, high-frequency, instant” credit services for “gig economy” workers, was mercilessly “defeated” at a budget approval meeting. Their opponent was a “traditional” project from the corporate finance department—providing a “syndicated loan” of several billion yuan to a large state-owned infrastructure enterprise, with low risk. The latter presented a thick, impeccable financial forecast report, issued by a top accounting firm, which clearly showed all the judges the stable, predictable “interest income” that this loan could bring to the bank over the next ten years. And the former, the “gig economy” team, all they could offer were some vague “user insights” about the “future lifestyle of young people,” and a small-scale “market experiment” plan full of “uncertain” assumptions.

Friends, if you were a judge that day, to whom would you cast your precious “budget vote”? Any “rational” manager would choose the former. Because the former represents “certainty” and “safety,” while the latter represents “risk” and “the unknown.” This is the entire secret of “institutional strangulation.” It does not stem from anyone’s “malice” or “short-sightedness.” It is precisely the “collateral damage” that is inevitably produced when the organization’s most “rational,” most “scientific” resource allocation process is faithfully and efficiently executing its “mission.” This process was designed for the sole purpose of “killing” the “anomalies” that do not conform to the organization’s existing “standards of success.” And disruptive innovation is precisely the biggest “anomaly.”

The “gravity” of the value network and the “bias” of resource allocation, these two powerful, institutionalized “Contractionary Forces,” together constitute the behemoth of “process inertia.” It makes a successful organization, when faced with a disruptive threat, systematically lose the ability to “see” and the ability to “act.” It builds a seemingly impregnable “cognitive great wall” around the organization, a wall built of “past successful experiences.” This wall is effective in defending against the attacks of “same-dimension” competitors from the outside. But it also at the same time obscures the organization’s vision to look outward, preventing it from seeing the real “disruptors” who are quietly approaching from “another dimension.”

IV. Case Study: The Typical Symptoms of “Big Company Disease” and the Twilight of Nokia

(1)The Clinical Diagnostic Manual for “Big Company Disease”

Friends, after we have systematically dissected the three internal mechanisms of organizational “entropy increase,” communication costs, and the innovator’s dilemma, we are now like doctors with pathological knowledge, already able to understand the root causes of diseases from a theoretical perspective. What we need to do now is to walk into the ward and learn how to, by observing the specific, visible clinical symptoms, accurately diagnose whether and to what extent an organization has already contracted the chronic, debilitating organizational cancer known as “big company disease.”

This is not just a diagnostic manual for corporate managers; it is also a mirror that each of us, as individuals within a large organization, can use for self-reflection.

Symptom 1: “Meeting-driven” rather than “mission-driven.” This is the most common and most easily perceived early symptom of big company disease. A healthy organization, all its actions should be like a sunflower, closely revolving around the sun named “creating value for customers.” However, in a diseased organization, this sun will gradually be replaced by countless artificial moons created by internal departments—that is, endless internal meetings. The operation of the organization is no longer pulled by external customer demand, but is pushed by internal meeting agendas.

In my many years of management career, I have personally witnessed the entire process of this alienation. In the early stages of an organization, meetings are scarce and efficient. Every call to a meeting means there is a major “battle” that must be fought immediately. But as the organization matures, the number of meetings will grow exponentially, and their nature will quietly change. Meetings are no longer a tool for solving problems, but have evolved into a “political theater” for distributing power, displaying status, and avoiding responsibility.

People will spend a great deal of time creating exquisite presentation decks for reporting to superiors in meetings, decks that are even more exquisite than the external promotional materials, but have little time to actually contact customers and solve problems. In these meetings, real decisions are rarely made. What happens more are the repeated transmission of information, the mutual shirking of responsibility, and the guessing of the superior’s intentions. Whether a proposal can be passed often does not depend on its own business value, but on the proposer’s “faction” and “clique” within the organization. The organization has degenerated from a field of action for creating value into a stage of performance for consuming energy.

Symptom 2: “Process over output.” This is the most fatal manifestation of entropy increase at the executive level. An organization’s evaluation system no longer focuses on the final output quality, but is obsessed with the perfect control of the process. Whether something is done well is no longer judged by whether the customer is satisfied, but by whether the company’s process regulations have been strictly followed. In order to avoid any potential risks, the processes are designed to be more and more complex, and the approval nodes are more and more numerous, which greatly weakens the organization’s ability to act.

Behind this is a profound mentality of “responsibility outsourcing.” When a project fails, the first thing the relevant personnel do is not to reflect on the mistakes in decision-making, but to pull out a large pile of process documents to prove that “every step I took was compliant, so the failure is not my responsibility.” The process becomes a “perfect alibi” for individuals to avoid responsibility. This culture makes the organization, when faced with uncertainty, instinctively choose the “safest” rather than the “most correct” path. A keen employee discovers a fleeting market opportunity, but by the time he has gone through the company’s two-month-long project approval process, the market trend has long since shifted. The pursuit of procedural correctness ultimately leads to the error of the result.

Symptom 3: The “jargonization” of internal language. An organization begins to develop a set of “jargon”【Note: Jargon (黑话, hēi huà): Originally refers to the argot used within a specific group or secret society, which is difficult for outsiders to understand. In the modern corporate context, it is often used sarcastically to refer to abstract, empty management buzzwords or fashionable terms that are detached from reality.】 that only its own people can understand and that is detached from the reality of the front-line business. People are keen to talk about top-level design, underlying logic, ecological countermeasures, combination punches, empowerment, using these seemingly advanced but actually empty words to package mediocre ideas.

The prevalence of this jargon is a clear signal of the organization’s internal “information silos” and “thought ossification.” On the one hand, it exacerbates the communication barriers between departments, making the already complex collaboration even more difficult. On the other hand, it also makes the organization gradually lose the ability to speak plain language and to dialogue with the real world. When an organization’s manager is accustomed to thinking in a language like “breaking through the underlying data links to achieve a marketing closed loop,” he has in fact already lost the ability to feel the simplest, real need of “I just want to buy something” from the perspective of an ordinary consumer.

Symptom 4: “Zero tolerance” for failure. As the organization succeeds, a mentality of being unable to afford to lose begins to spread. Any innovative project is required to prove its inevitable success with a perfect financial model before it even starts. This causes the organization to only dare to repeat the proven, high-certainty sustaining work, while shying away from the disruptive explorations that are full of uncertainty and have a high failure rate.

The organization’s immune system will have an excessive stress reaction to “failure.” A small trial-and-error failure may be infinitely magnified into a “competence problem” or “judgment error” of the project leader, thereby affecting his career prospects. This cultural atmosphere makes the “risk appetite” within the organization approach zero. In the end, while avoiding all small failures, the organization has also planted the seeds for the biggest, final failure—being eliminated by the times.

Symptom 5: The “cog-ization” of talent. Under a strict hierarchy and fine division of labor, the individuals in an organization are more and more like cogs that can be replaced at any time. They are only familiar with the small piece of work they are responsible for, but are ignorant of the organization’s overall strategy and the global logic of the business.

This certainly ensures the stable operation of the organization, but it also greatly suppresses the individual’s growth space and creative potential. I have seen many young people who have worked in large companies for ten years. Their resumes look glamorous, but their real abilities may be limited to operating a specific, company-internal software system. They are like flowers in a greenhouse. Once they leave this specific environment, they will find themselves completely unable to adapt to the fierce market competition outside. Excellent talents, because they see no hope for growth and feel that they are just an insignificant part of a huge machine, choose to leave one after another.

Friends, these five major symptoms are like five fatal ropes. They are intertwined and together they strangle the vitality of an organization. And all their tragic consequences are most concentratedly and most regrettably embodied in a once-glorious name.

(2)The Twilight of Nokia: A Pathological Specimen of “Contractionary Force” Conquering All

For many young people today, Nokia may just be a somewhat unfamiliar historical term, a synonym for a sturdy and durable “ancient artifact” that could be used to crack walnuts. But in the early years of this century, it was an undisputed emperor, existing like a deity. In 2007, the year the first-generation iPhone was released, Nokia’s share of the global mobile phone market was an astonishing forty percent.【Note: Data source: Gartner. In the fourth quarter of 2007, Nokia’s global mobile phone market share reached 40.4%.】 This number meant that for every ten mobile phones sold on Earth, four were Nokia. Its market value once exceeded one hundred and ten billion euros. Its slogan, “Connecting People,” resonated around the world. In Finland, this company even contributed four percent of the national GDP and twenty-three percent of its exports.

However, it was such a seemingly unassailable empire that collapsed at an avalanche-like speed in just a few short years. By 2013, its market share had fallen to less than three percent, and ultimately, its mobile phone business was sold to Microsoft for a “humiliating” price at the time—seven point two billion dollars.

The defeat of Nokia is one of the most complex and most worthy of repeated study cases in business history. Countless scholars and experts have analyzed it from various angles such as strategy, technology, and market. But if we re-examine its interior with the microscope of the “Four Forces Model,” we will find that Nokia’s death was not due to any single cause, but to the full-scale, systematic outbreak of its internal “Contractionary Force.” It is the most perfect pathological specimen of a collective attack of all the symptoms of “big company disease.”

First, was the “Tower of Babel of communication” and the complete loss of focus of goals. At the peak of the empire, Nokia’s interior was no longer a monolithic block. It had split into at least three major, mutually warring “principalities”: the “old nobility” department, centered on the Symbian operating system, which held the company’s main source of profit at the time; the “new sharp” department, centered on the Maemo/MeeGo operating system, which represented the company’s exploration of the future of smartphones; and the “cash cow” department, responsible for the feature phone business. These three departments spoke completely different “languages” and had completely different “interest demands.” The Symbian department, immersed in past glory, only wanted to make patchwork improvements to this already aging system. The MeeGo department, on the other hand, was ambitious, trying to create a new future that could compete with iOS and Android. And the feature phone department only cared about how to acquire more shipments in emerging markets like Asia, Africa, and Latin America at a lower cost.

A former Nokia executive, in his later memoirs, painfully described how the company’s internal meetings were less about discussing the future and more about playing the “game of thrones.” The head of each department did his best to defend his own territory and budget, and to denigrate the projects of other departments. A strategic decision about the operating system, which concerned the future fate of the company, was repeatedly delayed and wavered in this endless internal friction and wrangling.

Second, was the “innovator’s dilemma” and the strangulation of vitality by process. A well-known yet highly ironic fact is that Nokia was actually the “prophet” who had the earliest insight into the entire future of the smartphone on this planet. As early as 2004, three years before the birth of the iPhone, Nokia’s internal research team had already developed a smartphone prototype with a large color touch screen, a concept similar to the App Store, and even support for network video calls. It was almost an iPhone that had “traveled back in time.”

However, this highly visionary project was mercilessly shot down in Nokia’s rigid, hardware-centric approval process. The reason was ridiculously simple: under the financial model calculations at the time, the hardware cost of this prototype was too high to achieve scalable profitability in the short term; and its radical design, centered on software and internet services, completely subverted Nokia’s mature business model, which was based on hardware sales. This is the most real re-enactment of the “chief risk officer’s nightmare.” Nokia’s powerful “Equilibrium Force” system, which was designed to optimize feature phones, successfully played the role of an “immune system.” It accurately identified this disruptive “anomaly” and completely eliminated it to protect the “health” of the existing body.

Finally, was the collective “numbness” of the entire organization to market changes, a numbness brought about by great success. When the first-generation iPhone was released, Nokia’s executives generally held an attitude of contempt and ridicule. They mocked the iPhone for not being able to change its battery, for its poor signal, and for being so fragile that it would break if dropped. They, from a mature, feature-phone-era “hardware” mindset, were completely unable to understand what the seemingly crude “software” ecosystem of the iPhone, and the “user experience” revolution it brought, actually meant. Their senses had been numbed by past great successes. Their organizational “nervous system,” due to internal embolism, could no longer receive fresh signals from the real world. They were still living in the old world of “competing on call quality, standby time, and drop resistance,” and were blind and deaf to a new world centered on “apps” and the “internet.”

When the internal communication cost of an organization is so high that even the most fundamental strategic question of “to be or not to be” cannot form a consensus; when the organization’s decision-making process is so rigid that even the “life-saving straw” concerning the future will be strangled by its own hands; when the entire organization’s mindset is so closed that it cannot feel even a hint of the cold from the tsunami-like change that is right in front of it, then, no matter how great it once was, its fate is sealed.

The twilight of Nokia is not a story of technological failure, nor is it a story of strategic misstep. It is an inevitable tragedy of an organization’s “Contractionary Force” completely triumphing over its “Expansionary Force” and “Evolutionary Force.” It is like a cold mirror, reflecting the darkest fate that all large organizations may face.

Section 3: The Equilibrium Force: The Hand of Order, Rules, and Stability

I. The Birth of Bureaucracy: Max Weber’s Light of Reason

(1)The Chaos of “Rule by Man” and the Rise of “Legal-Rational Authority”

Friends, after we have jointly delved into the dark “abyss” of the “Contractionary Force,” an abyss full of entropy increase, fragmentation, and decay, we may fall into a profound “historical pessimism”: if the “entropy increase” of an organization is a fate as irresistible as a physical law, then can humanity only passively accept this tragic ending of sliding from order to chaos and ultimately to collapse?

The answer is no. Because humanity, as the only intelligent life on this planet with the ability of “reason” and “reflection,” one of its greatest characteristics is “not accepting fate.” We have been constantly trying to use our collective wisdom to build an “order” to counter our own individual instincts and the physical fate of the universe. This powerful, rational counterforce, aimed at combating entropy increase and maintaining stability, is the most solid anchor in our “Four Forces Compass,” the one that represents order and rules—the Equilibrium Force.

And to understand the essence of the Equilibrium Force, we must conduct a thought archaeology, returning to the “eve” before the birth of the modern organization, to feel the chaotic world of “rule by man,” full of arbitrariness and uncertainty, before the dawn of the Equilibrium Force illuminated the world.

Before the birth of modern bureaucracy,【Note: Bureaucracy: Also known as官僚制 (guān liáo zhì), is an ideal organizational management system proposed by the German sociologist Max Weber, characterized by rationality, impersonality, and hierarchy.】 the source of power in the vast majority of human organizations was not the institution, but the person himself. The great sociologist Max Weber called this power, based on the extraordinary character of a leader, “charismatic authority.”【Note: Charismatic Authority: One of Weber’s three types of authority, which refers to power derived from a leader’s extraordinary, charismatic, or heroic personal charm and character. Followers obey due to their high admiration and trust in the individual.】 A tribal chief, a founding monarch of a kingdom, an ever-victorious general of an army, a legendary founder of an enterprise—they are all typical charismatic leaders. Their authority comes from the superhuman wisdom, courage, and vision they have shown in past victories. The members of the organization are willing to follow and obey them not because of the provisions of some rulebook, but because they “believe” in this person from the bottom of their hearts. They believe that by following him, they can win battles and live a good life.

This human-centered organization, when it is in its rising phase of the Expansionary Force, can often burst forth with astonishing efficiency and fighting power. Because it saves all the tedious processes and rules. The leader’s word is the highest law, and the leader’s intuition is the final strategy. The organization is like an extension of the leader’s body, able to respond to external challenges with extremely high agility, like a finger being moved by an arm.

However, friends, the B-side of this charm of rule by man is its fatal curse. The first curse is “unpredictability.” When the rules of an organization are entirely dependent on the heart of one leader, the entire organization will be shrouded in a huge uncertainty. Today, he may praise you and promote you exceptionally for a highlight of yours, and tomorrow, he may also, for an unintentional mistake of yours, or just because he is in a bad mood, cast you into the cold palace. In this “the sovereign’s heart is hard to fathom” environment, the members of the organization will tend to invest most of their mental energy into the dangerous court politics of second-guessing and catering to the superior’s will, rather than focusing on the business itself that can truly create value.

In my early banking career, I witnessed the huge risks of this “rule by man.” I met a branch president with great personal charm. He had a keen sense of smell, dared to fight and take risks, and led the branch to achieve rapid performance growth in a few years. His decision-making style was typically charismatic. He often bypassed the head office’s tedious approval process and made decisions on some high-risk loans based on his own experience and “feel” for the customer. During his tenure, the branch was glorious. But when he was transferred due to age, the “power vacuum” he left behind and the risks that had been covered up by his personal charm exploded. The new president’s style was completely different, and many of the past “unwritten rules” no longer applied. The entire branch’s business backbone fell into a state of not knowing what to do. What was worse was that the loans that had been “approved by a nod” at the time, because they lacked a rigorous process constraint, began to have problems one after another, ultimately causing the bank hundreds of millions of yuan in losses. This case profoundly illustrates that the health of an organization can never be built on the shoulders of a single hero.

The second curse is “unsustainability.” Charisma cannot be inherited. When the founder with heroic charisma finally exits the stage of history due to old age or death, the organization he has built, which completely relies on his personal authority, will inevitably fall into a bloody war of succession for the power vacuum. Countless great empires in human history, after the death of their founding heroic rulers, have quickly disintegrated due to the internal strife of their descendants. This is the cyclical fate that the rule-by-man model cannot escape.

It is precisely on this ruin of rule by man, full of arbitrariness, uncertainty, and unsustainability, that a profound institutional revolution, aimed at using reason to counter the weaknesses of human nature, began to quietly brew in Europe. The standard-bearer of this revolution was none other than Max Weber, whom we have introduced before. Weber, with his deep gaze that penetrated history, declared to us: a truly modern organization that can achieve long-term stability, the legitimacy of its power must, and can only, complete a fundamental paradigm shift—from a personalized trust in a specific person to an institutionalized trust in a set of impersonal, universal rules. This is what he defined as “legal-rational authority.”【Note: Legal-Rational Authority: One of Weber’s three types of authority, which refers to power derived from people’s belief in the legitimacy of a set of written, rational laws and rules. People obey not a specific person, but the rules themselves, and the person in power who has obtained their position according to the rules.】

In this new paradigm, we obey a leader not because we admire his personal charisma, but because we believe that he has been legally appointed to this position through a fair procedure. We abide by a rule not because it is the personal will of a certain leader, but because we believe that this rule has been formulated through a rational procedure and is a public law applicable to all.

Friends, you see, the essence of this paradigm shift is a profound process of disenchantment. It has taken power down from the altar of mystery, heroism, and personal color, and placed it on the institutional foundation, which, though a bit dull, is incomparably solid, jointly built by reason, procedure, and rules. This is precisely the first time in the history of human organization that the Equilibrium Force, in a systematic and theoretical posture, has declared war on the entropic force of human nature, which is full of chaos and uncertainty. And the ultimate weapon of this war is the rational, perfect machine that Weber has described for us—bureaucracy.

(2)Weber’s “Ideal Type”: The Core Features of a Rational Bureaucratic System

Friends, after we have deeply understood the great intellectual revolution from “rule by man” to “rule by law,” we can officially enter the ideal palace built for us by Max Weber, a palace full of the light of reason. We must emphasize again that the “bureaucracy” described by Weber is not a depiction of any specific, bureaucracy-ridden government or enterprise in the real world. It is an “ideal type,”【Note: Ideal Type: A core concept in Weber’s sociological methodology. It does not refer to an “ideal” or “perfect” state, but to a “conceptual model” or “measuring stick” with internal logical consistency, which a researcher, in order to analyze and compare social phenomena, selectively and even slightly exaggeratedly extracts from complex reality.】 purified by thought. It is the purest and most perfect form that the Equilibrium Force can theoretically achieve. This ideal organizational palace is jointly supported by several indestructible pillars of reason.

The first pillar is “a clear hierarchy of authority and a strict bureaucracy.” The entire organization is designed as a pyramid with a clear outline. Every position has its clear scope of power and responsibility, defined by regulations, within this hierarchy. Subordinates strictly obey the command and supervision of superiors, while superiors are responsible for the actions of their subordinates. Orders are transmitted down level by level, and information is reported up level by level. This strict hierarchical structure ensures the unity and discipline of command, completely eliminating the chaos caused by multiple leadership and unclear responsibilities.

This system is similar in spirit to Fayol’s “scalar chain” principle, but Weber’s perspective is grander. What he saw was not just the management efficiency within an enterprise, but the very foundation on which the entire modern state machine operates. Let’s turn our gaze to Prussia, the German state famous for its discipline and efficiency. It was Prussia that, in the 18th and 19th centuries, was the first to establish the most professional and largest civil service system in Europe. This system, from the central government in Berlin to the tax officer in every remote village, followed a strict hierarchy and reporting relationship. It was precisely by relying on this powerful bureaucratic machine that Prussia, with the resources of a second-rate country, was able to accurately mobilize the manpower and material resources of the entire nation to challenge and ultimately defeat the traditional continental powers like Austria and France, completing the unification of Germany. Bureaucracy first demonstrated its unparalleled “Equilibrium Force” at the level of state governance.

The second pillar is “reliance on written, impersonal rules and procedures.” This is the soul of Weber’s thought. It emphasizes that the operation of an organization does not rely on anyone’s personal emotions, preferences, or whims, but strictly on a set of public, stable, and detailed rules and regulations. The operation of the organization is like the execution of the law, and “treating matters, not people” becomes the highest principle. This is like implanting a ruthless algorithm into the central nervous system of the organization. It excludes all uncertain human factors, ensuring that the organization’s decisions and actions have a high degree of predictability and fairness.

In my many years of banking work, I have a deep feeling for this. Whether a loan is approved or not, the final basis should not be my personal liking for the entrepreneur as an approval officer, but whether the corporate materials he has submitted meet the various hard indicators listed item by item in our Credit Approval Manual. This set of rules is the law of the bank, this bureaucratic machine. It guarantees the fairness and consistency in handling similar businesses, and to the greatest extent, excludes the possibility of personal bias and corruption. This is in sharp contrast to pre-modern business. For example, in the commercial city-states of medieval Italy, whether a loan could be approved largely depended on whether the borrower had a marriage relationship or a deep personal friendship with the banker’s family. Weber’s impersonal rules were a complete revolution against this pre-modern business model, which was full of nepotism and arbitrariness.

The third pillar is “personnel appointment based on professional division of labor and technical qualifications.” In the ideal state of bureaucracy, a position is obtained not by blood or wealth, but strictly based on the candidate’s professional knowledge, technical qualifications, and past experience. The best talent for a position is selected through public examinations or strict assessments, and “appointing people on their merits” replaces “appointing people by favoritism.” An official is a profession, requiring special training, and is taken as a lifelong career. This specialization ensures the rationality and technical precision of organizational decisions, and also makes the officials loyal to the organization itself rather than to a specific leader.

The greatness of this revolution lies in its creation of a new “upward channel” for society. In ancient China, the imperial examination system, founded in the Sui and Tang dynasties, was an early embodiment of this spirit. It broke the “nine-rank system” of the Wei and Jin dynasties, which was monopolized by the aristocratic clans, and provided a path for scholars from humble backgrounds to enter the center of power through fair examinations, greatly stimulating the vitality of society. Similarly, in a modern enterprise, the reason a young person with no background can, through his own efforts, grow from the grassroots to a senior manager step by step, is precisely because he relies on this impersonal promotion system based on ability and merit.

The fourth pillar, and its soul, is the “impersonal” organizational spirit. A bureaucrat must handle official business in an “impersonal, unemotional” manner. He must, like a precision judicial machine, coldly and objectively apply the legal rules to specific cases, without mixing in any personal emotions such as love, hate, sympathy, or anger. This spirit, on the one hand, ensures the fairness and impartiality of administration, and on the other hand, also creates the unique “cold” and “lacking in human touch” organizational atmosphere of a bureaucracy.

The reason Weber believed that bureaucracy was the most efficient form of organization was precisely because it possessed the advantages of a machine: precision, speed, clarity, unambiguity, calculability, predictability, and low cost. It, in an incomparable way, achieved the complete elimination of all chaotic, vague, and inefficient factors within an organization by the Equilibrium Force. Compared to the charismatic rule that relies on personal charm and is full of uncertainty, and the traditional rule that is subject to tradition and is inefficient, bureaucracy is undoubtedly a huge historical progress.

It provided the most solid and most reliable organizational foundation for the birth of the massive, precision-coordination-requiring commercial empires of the industrial age. However, it was also the most profound expounder of bureaucracy, Weber, who, with a prophetic anxiety, foresaw the terrible consequences it might bring. He keenly perceived that when this all-encompassing rationalization process reached its extreme, the entire society, including every individual within it, would be imprisoned in an invisible “iron cage” constructed of rational rules and bureaucratic procedures.

In this iron cage, the individual’s creative spirit, spontaneous emotions, and free will would be completely suffocated. People would live not for some noble value or belief, but merely to maintain the operation of this vast bureaucratic machine. This warning of Weber, like a sigh that has traveled through a hundred years, has cast a deep shadow on the glory of the pyramid. It tells us that the price of this seemingly perfect machine of efficiency, built in the name of reason, may be the comprehensive objectification of humanity and the disenchantment of the spirit. And the entire evolutionary history of human organization after the twentieth century is, in a sense, a never-ending struggle to break free from Weber’s iron cage without sacrificing efficiency.

II. Processes and Systems: Turning the Organization into a Precision Machine

(1)Process as a “Risk Firewall” and a “Power Decomposer”

Friends, if Max Weber’s theory of bureaucracy drew the architectural blueprint named “rationality” for the grand edifice of the modern organization, then “processes and systems” are every steel bar poured and every brick laid according to this blueprint. They are the most concrete, most micro, and most ubiquitous embodiment of the Equilibrium Force within an organization. The essence of processes and systems is a weapon for an organization to fight against the two entropic forces of “forgetting” and “arbitrariness.” It attempts to peel the successful experiences, efficient methods, and safe paths, which have been proven by practice, from the personal abilities of a few genius employees and transform them into an organizational capability that can be replicated on a large scale and mastered by all ordinary employees.

During my many years as a vice president of a bank branch, I have repeatedly emphasized a point to the newly hired loan officers: a bank, as an institution that manages risk, its foundation of survival lies not in how strong a star loan officer’s market development ability is, but in whether it has a powerful risk management process that “even if you replace him with a mediocre loan officer, will never make a subversive mistake.” This set of processes is the collective wisdom and muscle memory that the bank, this organization, has accumulated over hundreds of years and with the painful tuition of countless non-performing loans. It is a thick operating manual written with real money. The operation of this precision machine is mainly realized by playing the two complementary roles of a “risk firewall” and a “power decomposer.”

First, process is the organization’s most solid “risk firewall.” When an organization’s Expansionary Force is fully stimulated, its interior is bound to be filled with a high-spirited, optimistic, and even reckless mood. At this time, a well-designed set of processes is like a calm, unemotional “gatekeeper.” Its duty is not to share the joy of victory, but to mercilessly turn away the “unwelcome guests” who may bring fatal dangers at the door of the banquet of celebration.

Let’s return to the familiar bank credit scenario. When an account manager excitedly brings back a loan project that he believes has unlimited prospects to the branch, he cannot decide to grant this loan solely based on his own passion and judgment. He must initiate a long and rigorous process. He first needs to write a detailed Due Diligence Report. This report is not a free-form essay, but a standardized questionnaire with a strict format and dozens of required items. He must clearly answer a series of questions in the report: What is the equity structure of this enterprise? What is its history? What are its main products? What is the landscape of its upstream and downstream industrial chain? How has its financial statement performed in the past three years?

Behind every required item in this report corresponds a bloody risk event that has happened in the past. For example, the reason why it is required to conduct a penetrating check on the equity structure is because we have encountered cases where enterprises concealed their actual controllers through complex nominee shareholding relationships, and ultimately conducted related-party transactions and hollowed out the company. The reason why it is required to analyze its cash flow statement is because we have been deceived by some “bloated” enterprises with high profit statements but continuously negative cash flow, and ultimately suffered huge losses due to their capital chain rupture. This report is the first firewall set up by the process. It compulsorily requires the front-line business personnel to switch from the Expansionary Force thinking of making a deal to the Equilibrium Force thinking of controlling risk, to systematically and without blind spots examine the whole picture of a business.

Second, process is the most efficient “power decomposer” within an organization. Any organization, as long as its scale expands to a certain extent, will inevitably have to face an eternal governance dilemma: how to prevent the risk of abuse and corruption that may be brought by the excessive concentration of power? Ancient Chinese governance wisdom has long had a profound insight into this. The “Three Departments and Six Ministries system”【Note: Three Departments and Six Ministries system: Was a highly organized and clearly divided central bureaucratic system in ancient China. Among them, the Central Secretariat was responsible for decision-making (drafting edicts), the Chancellery was responsible for review (vetoing edicts), and the Department of State Affairs was responsible for execution. The heads of the three departments together formed the prime minister group, checking and balancing each other, and were jointly responsible to the emperor.】 established in the Tang Dynasty was a “check and balance mechanism” formed by placing the three major powers of decision-making, review, and execution in different institutions. This profound political philosophy wisdom is perfectly reflected in the process design of modern organizations.

After the account manager has completed that due diligence report, he has no approval power. This report will enter a “separation of lending and approval” check and balance process. It will be submitted to an independent risk management department or credit approval department that does not bear any performance indicators. The approval officers in this department are like cold judges. Their sole duty is to pick at every detail of this report with a suspicious and critical eye. They will ask sharper, more in-depth questions: “You said that this company’s accounts receivable are large because its downstream customers are strong. Please provide a list and credit records of these downstream customers.” “You said that this company’s inventory value is very high. Do we need to hire a third-party appraisal agency to conduct an on-site inventory check and valuation?”

If the approval officer approves this loan, it may also need to be reported to the branch’s credit approval committee for a collective decision. This committee is composed of the branch president, the head of the risk department, the head of the finance department, the head of the legal and compliance department, and other roles. Each person will conduct a final consultation on this business from their own professional perspective. This seemingly tedious “three-tiered trial”-style process is in its essence a clever decomposition and check and balance of power. It avoids the excessive concentration of power in a certain link or a certain person, which could bring a huge disaster to the entire organization due to their personal moral hazard or cognitive bias. It replaces individual judgment with a collective rationality, which is the core wisdom of the Equilibrium Force in organizational structure design.

Friends, you see, the true power of processes and systems lies in their playing two roles at the same time. As a “firewall,” it uses standardized rules to defend against external risks. As a “decomposer,” it uses a check and balance mechanism to resolve internal human weaknesses. It is like installing the most advanced braking system and body stability system for a high-speed racing car. It may at some times sacrifice a bit of ultimate speed (Expansionary Force), but what it gets in return is the safety, stability, and controllability of the entire driving process, ensuring that this racing car will not be destroyed in a crash due to a turn that is too sharp or an unexpected tire blowout. The Warring States thinker Han Feizi once said: “A state is not always strong, nor always weak. Those who uphold the law are strong, and the state is strong; those who are weak in upholding the law, the state is weak.”【Note: From the “You Du” chapter of the Han Feizi. The meaning is: a state is not eternally strong, nor eternally weak. If the people who follow the law are strong (i.e., in a position of power in the organization), then the state is strong; otherwise, the state is weak.】 For an organization, this internal “law” composed of processes and systems is precisely the fundamental guarantee of whether it can traverse cycles and travel steadily and far.

(2)Process as a “Knowledge Sedimentation Device”: From Personal Experience to Organizational Wisdom

Friends, after we have jointly witnessed how processes and systems, as a “risk firewall” and a “power decomposer,” have provided crucial stability and security for the vast machine of an organization, we must push our cognition one level deeper. Because the manifestation of the Equilibrium Force in a truly great organization is by no means just passive defense, but also an active learning and evolution. And processes and systems have played the most silent and most critical role in this history of organizational evolution—that of a knowledge sedimentation device.

To understand this concept, we must first return to the pre-modern world of artisans, a world full of the rule of man. In a workshop dominated by a few genius artisans, what was the organization’s most precious asset? It was the “craft” and “knack” that could not be articulated and could only be understood intuitively. This precious “tacit knowledge”【Note: Tacit Knowledge: A concept proposed by the philosopher Michael Polanyi, which refers to the knowledge that we know but find difficult to express clearly in language. It is usually acquired through practice, imitation, and experience, as opposed to “explicit knowledge,” which can be transmitted through books and language.】 was entirely parasitic on the individual artisan’s brain and muscle memory.

This model, while capable of creating spiritual works of art, was also extremely fragile. When this genius artisan left, whether due to old age, illness, or being poached by a competitor, what he took with him was not just a laborer, but the entire organization’s most core knowledge asset. The organization would thus be set back to square one overnight. This is a typical, low-level organizational form that cannot resist the risks of time and personnel turnover.

And the most profound revolutionary aspect of the birth of processes and systems lies in its providing the organization with a powerful alchemy that can systematically and continuously sediment and transform the fragile, fluid, and person-dependent tacit knowledge into solid, stable, and organization-owned explicit knowledge.

The first step of this alchemy is the codification of experience. After a loan is granted, the process does not end. The post-loan management department will take over this work. They need to regularly track the operating status of this enterprise. If any abnormal risk signals are found, the system will automatically alarm and trigger a higher-level risk warning process. And when a loan unfortunately does turn into a non-performing loan, the entire process of disposing of this non-performing loan, every step, every lesson learned, will be recorded in detail and stored in the organization’s case library. This case library is the prototype of the organization’s collective brain, its memory’s hippocampus, which faithfully records every drop of blood shed and every scar left by the organization in its brutal struggle with the real world.

The second step of this alchemy is the sublimation of wisdom. If the case library is just a passive record of the past, then a truly evolutionary organization must have a cerebral cortex that can actively learn from and reflect on this history. In a mature organization, this cerebral cortex is usually played by a dedicated process optimization or risk policy department. Their job is no longer to handle specific businesses, but to, like a group of historians, repeatedly study and review the bloody war cases from the front lines.

Their core task is to ask the most fundamental “why”: why did we stumble so badly in the steel trade industry? Was it because we lacked an effective means to verify the authenticity of warehouse receipts at the time? Or was it because we over-relied on the borrower’s personal credit and ignored the systemic risks of the entire industry? Through such collective reflections, fed by countless failed cases, the organization’s wisdom is sublimated.

I still remember, after experiencing that costly steel trade crisis, the credit policy committee of our head office held a month-long closed-door meeting. The walls of the meeting room were covered with the complex equity structure diagrams and capital flow diagrams of the dozens of defaulting enterprises. We, like a group of detectives, tried to find the common criminal gene from this chaotic ruin. In the end, we came to a profound conclusion: the core of the risk in the steel trade industry lies not in the operating ability of a single enterprise, but in the opaque, mutually guaranteed network risk of the entire circle. The value of this cognitive sublimation is immeasurable, because it will directly guide us to carry out the final step of the alchemy.

The third and ultimate step of this alchemy is the institutionalization of cognition. When a precious lesson has been learned and mastered by the organization, it must be immediately transformed into a version upgrade or a patch update of the existing processes and systems, to ensure that the same mistake will never happen again in any corner of the organization. After that steel trade crisis review meeting, a brand new, independent chapter was immediately added to our bank’s Credit Approval Manual—”Special Risk Guidelines for Credit in the Steel Trade Industry.”

This guideline, in extremely strict, unquestionable legal language, stipulated: first, for all loan applications from steel trading enterprises, the authenticity of their warehouse receipts must be strictly verified, and the cross-validation of at least two independent, third-party warehouse supervision companies must be introduced. Second, a penetrating check of the mutual guarantee circle network of all related enterprises and actual controllers behind the enterprise must be conducted, and the total liabilities of the entire network must be calculated on a consolidated basis. Third, the total credit line for this industry shall be subject to a unified ceiling management for the entire bank, and no branch shall exceed the limit.

Friends, you see, through such a complete learning loop of “practice (non-performing loan), feedback (case review), learning (cognitive sublimation), and iteration (system update),” the organization has completed a truly meaningful evolution. The painful tuition fees paid by countless individual loan officers, the personal knowledge they exchanged for with their careers, were ultimately not lost due to their departure or forgetting. They were successfully sedimented, purified, and finally solidified into the organization’s common, inheritable, and replicable organizational wisdom.

This is the entire secret of process as a knowledge sedimentation device. It is a great transformation process that turns the organization’s scars into armor. An organization without this mechanism is like a goldfish that can never learn from its mistakes. Its memory is only seven seconds, and it will repeatedly fall in the same place. An organization with this powerful knowledge sedimentation and self-repair ability is like a living organism with a strong immune system. It may still get sick, get injured, but every trauma will cause its immune system to produce new antibodies, thus making it stronger and wiser in the future. This is precisely the highest-order, and most evolutionary, victory that the Equilibrium Force can achieve in its war against entropy increase. It is no longer simply maintaining order, but, in the dynamic, continuous learning and repair, giving the organization, this machine, a soul of self-evolution.

III. Culture and Values: The Invisible “Behavioral Manual”

(1)”Culture Eats Strategy for Breakfast”: The Hard Constraint of Soft Power

In the temple of modern management thought, there is a saying that has been passed down like a gospel. It is concise, powerful, and even has a hint of indisputable finality, yet it precisely points out the most profound and most easily overlooked truth of organizational life. This saying comes from the master who, with his deep foresight, defined the entire management thought of the twentieth century—Peter Drucker. He said: “Culture eats strategy for breakfast.”【Note: Regarding the direct source of this famous quote, both academia and Drucker research institutions (such as the Drucker Institute at Claremont Graduate University) have pointed out that although it is widely attributed to Peter Drucker, no completely identical original record has been found in all his published works or recorded speeches. Therefore, this sentence should be seen as an extremely precise and powerful summary of the essence of his management thought, rather than a direct quote. Drucker, throughout his intellectual system, repeatedly emphasized the decisive role of an organization’s values, beliefs, and “unwritten rules” (i.e., culture) on management practice, believing that the “spirit” of an organization is far more fundamental than its strategic documents. For example, in his management magnum opus Management: Tasks, Responsibilities, Practices, he devoted a large amount of space to discussing “The Spirit of Performance,” emphasizing that managers must integrate the organization’s values and beliefs into its daily operations, because “‘what to do’ stems from ‘what one is’.” And in his earlier classic, The Practice of Management, he also pointed out that the primary task of management is to “create a true whole that is larger than the sum of its parts,” and the adhesive of this “whole” is precisely a common culture and values. The widespread dissemination of this maxim is believed to be related to Mark Fields, then President and CEO of Ford Motor Company, who quoted it in a meeting in 2006 and attributed it to Drucker, after which it became deeply ingrained in the business world.

References:

Drucker, Peter F. Management: Tasks, Responsibilities, Practices (Collector’s Edition). Translated by Wang Yonggui et al., China Machine Press, 2008.

Drucker, Peter F. The Practice of Management (Collector’s Edition). Translated by Qi Ruolan, China Machine Press, 2009.

Cohen, William A. “The Real Story of ‘Culture Eats Strategy for Breakfast’.” The Drucker Institute, September 19, 2014.】

This sentence is by no means a casual witticism. We must, with the prudence of a “biographical excavation of a thinker,” trace the profound insight behind it. Drucker himself, as an intellectual who fled from Austria to the United States, had personally witnessed how the seemingly rational, precise state machines on the European continent could make the craziest strategic decisions under the call of fanatical, irrational ideologies. This experience gave him a lifelong vigilance and reverence for the “irrational,” hidden forces within an organization. Therefore, when he examined modern business organizations, he saw far more than just clear organizational charts or logically rigorous strategic planning reports. What he could “see” was the “force field” that permeated the air of the organization, a force field composed of common beliefs, unwritten rules, and tacitly approved behavioral patterns. This is culture.

In our Four Forces Compass system, culture and values are precisely the highest-order and most essential manifestation of the “Equilibrium Force” dimension. If the bureaucracy advocated by Max Weber built the rational, hierarchical “steel skeleton” for the organization, this machine, defining the ownership and flow of power, then processes and systems are the “precision gears” and “transmission shafts” that mesh with each other within this machine, aiming to ensure the stability and predictability of the machine’s operation through standardized procedures. However, what truly determines whether this machine will sail smoothly to its intended destination, or will deviate from its course at a critical moment, or even self-destruct, is the invisible “operating system”—the organization’s culture.

Strategy answers the question of “where the organization is going.” It points to a distant shore full of opportunities. Process stipulates “how we should get there.” It attempts to draw a chart as detailed as possible for the journey to that shore. However, no chart can predict all the storms, reefs, and fogs that may be encountered during the voyage. When the grand direction of the strategy meets the specific and ambiguous moments of choice in reality, when the clauses of the process manual cannot cover a new, uncertainty-filled dilemma, what is it that guides the behavior of every sailor on the ship? What is it that determines whether they choose to stick to their posts or slack off in the dead of night when no one is watching? The answer can only be culture.

Culture is the invisible “behavioral manual” engraved in the heart of every member of the organization. It is a default algorithm for “prioritizing judgments” that has been internalized. It tells employees, in an almost instinctive way, what is truly encouraged in this organization, and what is advocated in words but actually despised; when the long-term interests of the customer conflict with the short-term profits of the company, which one should be prioritized; when an innovative opportunity full of risks and a conservative plan that ensures safety are presented, which one are we more inclined to embrace. These daily, countless individual micro-choices, like trickling streams, ultimately converge into the organization’s strategy’s incredibly real “trajectory of practice” in the real world. This trajectory is often vastly different from the original ambitious “planned trajectory.”

As a veteran who has been engaged in risk management in the banking industry for more than thirty years, I can say without exaggeration that most of my career has been spent personally witnessing the real-life drama of “how culture eats strategy.” Let me take you into a typical bank credit approval committee meeting room, where the flow of hundreds of millions of funds is decided. On one side of the meeting room is the business team, representing the organization’s “Expansionary Force.” They have brought meticulously packaged project proposals, using detailed data and optimistic forecasts to argue how a new loan will help the bank occupy an emerging market, acquire a strategic customer, and create extremely attractive profit returns. Their logic is impeccable, their passion is infectious, and their presentation deck is a perfect miniature sample of an “expansion strategy.”

And at the other end of the long table sit us, representing the “Equilibrium Force”—the representatives of the risk management, compliance, legal, and other departments. We examine not just the shiny financial model. We pay more attention to the intangible “risk factors” outside the model. We will repeatedly ask: What is the true character of this customer? Have the cyclical risks of this industry been fully exposed? Is the structure of this transaction too complex, so that it may hide a “devil” that we have not yet seen? In many cases, a loan is ultimately rejected not because the project is mathematically unfeasible. On the contrary, it may be mathematically flawless. The real reason it is rejected is a deeper, unquantifiable judgment: “This project does not conform to our bank’s prudent risk culture.”

This moment is the most vivid and most cruel real-life portrayal of Drucker’s famous saying. The “strategy,” which carried huge hopes for growth, was blocked by an invisible yet indestructible “firewall” built by “culture.” Here, culture played the role of the ultimate “Equilibrium Force.” It, in a flexible way, appealing to collective intuition and common values, put an invisible rein, woven from historical experience and a sense of awe, on the “Expansionary Force” wild horse that longed to gallop on the grassland of performance.

The reason this Equilibrium Force is so powerful and fundamental is that it has completed a profound leap in the logic of organizational governance, from “heteronomy” to “autonomy.” Processes and systems, no matter how complete, are in their essence a kind of external “heteronomy” that needs to be maintained by supervision, inspection, and punishment. Their effectiveness is highly dependent on the investment of management costs. A strong, healthy culture, on the contrary, is the exact opposite. It successfully internalizes the external constraint of “I must abide by the rules, otherwise I will be punished” into the internal identity of “this is how we, this collective, think and do things, otherwise I will feel ashamed.”

When this internalization is complete, the organization will greatly reduce its internal “management friction costs.” Because you no longer need a vast, pervasive supervisory system to ensure that the behavior in every corner conforms to the established norms. Employees will, because they sincerely identify with the value of “customer first,” proactively solve customer problems, rather than mechanically reciting the service manual. A team will, because they share the belief of “pursuit of excellence,” repeatedly polish the product details, rather than just being satisfied with “getting the job done.” This powerful “self-drive” and “self-correction” ability, driven by common values, is the most precious wealth that any KPI assessment or process chart can never give to an organization.

Therefore, we must soberly recognize that culture, this seemingly abstract, soft “soft power,” ultimately constitutes the most indestructible “hard constraint” of an organization in the real world. It is a “waterline” for the organization’s Expansionary Force. No matter how lofty the strategic ambition, once it touches this bottom line drawn by collective values, the giant ship of expansion will be stranded. It is a set of “genetic codes” for the organization, which determines what kind of “stress response” the organization will instinctively make when faced with the pressure of the external environment. It is also a “moat” for the organization. A competitor can copy your business strategy in a few weeks, can also imitate your core product in a few months, but they can never, in a short period, copy the unique culture that you have spent years, or even decades, to sediment.

An organization may, in the short term, achieve explosive success with a genius strategy. But history has repeatedly proven that only those organizations that have successfully built a strong cultural core and use it as their ultimate Equilibrium Force can, in the long, uncertainty-filled historical cycles, effectively resist the ruthless erosion of the irresistible natural force of “entropy increase,” maintain their own dynamic balance, and ultimately obtain the incredibly precious “ticket” to traverse time and achieve longevity.

(2)The Case of Haidilao: An Equilibrium Force Driven by a Culture of “Empowerment”

If culture is the invisible manual that guides organizational behavior, then in the history of contemporary Chinese business, no enterprise has more dramatically, and almost obsessively, returned the “right to write” this manual to the frontline employees who are closest to the cannon fire and can best hear the roar of the cannons, than Haidilao. The case of Haidilao provides us with an excellent, and even counter-intuitive, sample for observing how a unique “Equilibrium Force” is constructed: it no longer relies on a top-down, layer-by-layer, strict process, but does the opposite, achieving a more resilient and vibrant, dynamic organizational balance through a kind of almost “out of control,” bottom-up extreme empowerment.

In the ancient industry of service, especially in the chain restaurant field, “standardization” was once revered as the one and only truth. From McDonald’s fries that must be sold within seven minutes, to Starbucks’ second-level control over every cup of coffee made by a barista, the management philosophy behind them all stemmed from the rational spirit of Max Weber—to turn the organization into a precision, predictable machine that will not deviate due to human arbitrariness. This model is undoubtedly a manifestation of a powerful “Equilibrium Force.” It ensures the stability of the organization’s overall output by depriving individuals of their “discretionary power,” thereby effectively combating the “entropy increase” that is an inevitable result of scale expansion. However, this balance is a “rigid” balance. While ensuring the “lower limit” of service, it also completely locks the “upper limit” of service, ultimately creating an efficient, stable, yet often cold and impersonal “assembly-line” experience.

And the rise of Haidilao is a blatant challenge to this “iron law of standardization.” Frankly speaking, if in my early risk management career any business department had dared to propose a similar empowerment model as Haidilao’s, I might have, without hesitation, regarded it as a crazy proposal that would inevitably lead to large-scale moral hazard and financial loss of control. Because the core culture of Haidilao is precisely built on the “rebellion” against the traditional logic of the Equilibrium Force. It chooses to believe that a true balance that can adapt to complex human needs does not come from “distrust” and “guarding against” people, but from “trust” and “unleashing the potential” of people.

The most direct and most stunning manifestation of this culture is its famous “frontline employee empowerment system.” At Haidilao, the most ordinary waiter has not only the responsibility of smiling service, but is also endowed with real power that is enough to make any traditional chief financial officer’s heart tremble. This list of powers includes, but is not limited to: the “right to waive the bill,” to decide on their own to waive a customer’s bill, regardless of the consumption amount; the “right to give gifts,” to proactively give customers dishes, fruits, and even gifts; and the “right to make decisions,” to, when a customer encounters any problem, call upon resources to solve it for them without asking for instructions. As revealed by Professor Huang Tieying of the Guanghua School of Management at Peking University in his in-depth research work You Can’t Learn from Haidilao, the core of Haidilao’s management model is not process, but a trust system based on human nature. Its founder Zhang Yong’s philosophy is that only by giving employees power that transcends their positions can they provide services that exceed customers’ expectations.【Note: Source: Huang Tieying, You Can’t Learn from Haidilao, CITIC Press, 2011.】

Let’s use a classic “expert personal experience” style thought experiment to feel the uniqueness of this culture as an “Equilibrium Force.” Suppose in a traditional restaurant that strictly implements standardized processes, a customer accidentally spills a drink and stains their clothes while dining. According to the process, the standard action of the waiter might be: apologize immediately, bring a rag to clean the table, and ask the customer if they need help. If the customer proposes a claim, the waiter must report layer by layer, and the manager on duty, or even a higher-level manager, will, according to the company’s explicitly stipulated “customer complaint handling manual,” decide the amount and method of compensation. This whole process is rational, compliant, but also long and full of friction. The customer’s negative emotions, in the waiting and negotiation, are not soothed, but may be further amplified. This is precisely an outbreak of the organization’s “Contractionary Force” in a micro-service scenario.

And in the cultural framework of Haidilao, the logic of the entire event will be reconstructed. When the waiter sees the same scene, her inner “behavioral manual” tells her that her primary task is not to “comply with the process,” but to “make the customer satisfied.” And so, she might immediately make an unconventional reaction: while apologizing and cleaning, she proactively proposes that she can go to a nearby mall to buy a new piece of clothing for the customer, or directly give cash compensation, or even use her discount authority to provide an unimaginable discount for the customer’s consumption this time. She makes all these decisions without having to write a report, without having to wait for approval. She only needs to briefly report to the store manager afterwards. In this scenario, the “Contractionary Force” (customer dissatisfaction) caused by the accident is instantly “hedged” by a powerful, flexible “Equilibrium Force,” proactively released by the frontline employee, in the shortest possible time and in the most effective way.

So, a deeper risk management question follows: how does Haidilao ensure that this seemingly “out of control” power is not abused? How to prevent tens of thousands of employees from, in the name of “customer satisfaction,” being generous with the company’s money, ultimately leading to the collapse of the entire organization’s financial system? This is precisely the second, and more core, dimension of Haidilao’s culture as an “Equilibrium Force”: it, through building a closed loop of “trust-return” and a sense of belonging of a “community of common destiny,” has effectively “culturally constrained” the wild horse of “empowerment.”

First, is the equal sense of responsibility stimulated by ultimate trust. This management model has a deep insight into the “principle of reciprocity” in human nature. When an organization sends a strong signal to its employees that “I unconditionally trust you,” what the vast majority of mentally normal employees will return deep in their hearts will not be “how to take advantage of this trust,” but “I must not fail this heavy trust.” The active fulfillment of this psychological contract is far more effective in constraining human behavior than any punishment regulation. This coincides with the “Theory Y” proposed by the management scholar Douglas McGregor in his classic work The Human Side of Enterprise. Theory Y assumes that ordinary people are not inherently lazy about work, and under appropriate conditions, they are willing to take responsibility and exert their creativity. Haidilao is a large-scale, long-term social experiment of “Theory Y.”【Note: Source: McGregor, Douglas. The Human Side of Enterprise. McGraw-Hill, 2006.】

Second, is the “community of common destiny” shaped by the value of “changing one’s destiny with one’s own hands.” Haidilao has designed a clear, fair, and completely internally generated promotion channel for its employees, especially those from the bottom of society. All store managers, regional managers, and even higher-level managers must start from the most grassroots waiter. This means that the “right to waive the bill” you use today is not just a power, but also a “pledge of allegiance” to prove to the management that you “know how to think for the customers and for the company.” Every prudent and creative use of power you make is laying a solid step for your own path to a higher position. When an employee’s personal future is so closely and institutionally tied to the company’s long-term interests, abusing power is no longer “taking advantage of the company,” but “blocking one’s own future.”

Therefore, we can clearly see that Haidilao’s “Equilibrium Force” is an extremely clever system design, full of Eastern wisdom. On the surface, it gives up the micro-control of the “behavioral process,” but in fact, through the meticulous construction of the macro-environment of “selecting, educating, and motivating people,” it achieves an effective guidance of the “behavioral result.” It does not give employees a thick “operating manual,” but gives them a clear “value compass.” The pointer of this compass always points to “customer satisfaction” and “honesty and trustworthiness.”

Ultimately, this culture, with “empowerment” at its core, not only did not become a source of risk, but became Haidilao’s strongest “moat” and “Expansionary Force amplifier.” When Haidilao expanded at an astonishing speed across the country and even globally, what it needed to replicate was no longer hundreds of pages of operating procedures, but a living culture that could be “passed on, helped, and guided.” A new store manager only needs to successfully “transplant” this culture of trust and empowerment to the new store, and a vibrant service team with self-repair and innovation capabilities can quickly take root and sprout. This has allowed Haidilao’s expansion to, while maintaining extremely high service quality, avoid the bureaucracy and organizational sclerosis that are an inevitable result of scale expansion.

This is a perfect positive example of the saying “culture eats strategy for breakfast.” Here, culture did not eat the strategy, but became the most powerful “digestive enzyme” and “booster” for the realization of the strategy. It proves that in some fields, the highest level of balance comes not from control, but from liberation.

IV. Case Studies: The Standardization of McDonald’s and the Lean Production of Japanese Management

(1)The McDonald’s Hamburger Empire: The Ultimate Standardization of “Results”

When we withdraw from the “empowerment” culture of Haidilao, which is full of human warmth and improvisation, and turn to the other extreme of our case study, we enter a steel world ruled by cold reason, strict logic, and an almost religious worship of “certainty.” The creator of this world is McDonald’s. If Haidilao’s Equilibrium Force is a dynamic balance achieved by liberating humanity, then McDonald’s Equilibrium Force is a static, perfectly replicable, absolute balance achieved by restraining humanity, and even eliminating the uncertainty in human nature. It represents the highest achievement of twentieth-century industrial civilization in the consumer service sector, and also the most thorough, commercialized worldly practice of Max Weber’s rational bureaucratic system thought.

To understand the revolutionary nature of McDonald’s as a model of “Equilibrium Force,” we must, with a “historical documentary-style restoration” perspective, take ourselves back to the United States of the mid-twentieth century. At that time, the United States was being swept by a wave of “Expansionary Force” driven by the automobile. The interstate highway network was constantly extending, and countless families were driving their Fords or Chevrolets across the vast continent. However, behind this flowing landscape lay a huge “entropy increase” in the dining experience. The roadside restaurants were mostly small, family-run shops, and their service quality, hygiene conditions, and food taste were full of huge, unsettling randomness. Every stop for a meal was like a gamble. You might encounter a delicious and affordable home-cooked meal, but you were more likely to encounter an hour-long wait, dirty tableware, and inedible food. This was a typical disordered market, lacking the constraint of “Equilibrium Force.”

What Ray Kroc, the founder of McDonald’s, perceived was not how great the potential of the hamburger product itself was, but the extreme craving for “certainty” in this chaotic market. What he wanted to sell was not so much a food, but a promise: whether you were in Bangor, Maine, or in San Diego, California, as long as you saw the golden arches, you would get a completely consistent, predictable experience—the same tasting hamburger, the same temperature fries, the same fast service, and the same clean restrooms. To fulfill this promise, McDonald’s built an ultimate standardization balance system, one unprecedented in human business history.

The source of this system did not come from Kroc, but from the original founders, the McDonald brothers. They, in the manner of Henry Ford transforming the automobile production line, conducted a complete industrial revolution on the traditional restaurant kitchen, creating the so-called “Speedee Service System.” They broke down, simplified, and reorganized every process in the kitchen to the extreme, like choreographing a ballet in the kitchen. From the time for grilling the patties, the order of sprinkling the seasonings, to the action of wrapping the hamburgers, every link was precisely designed and solidified. The result was an exponential increase in serving efficiency, and the possibility of human error was reduced to a minimum. This system was the “core” of McDonald’s Equilibrium Force.

However, what truly elevated this core from a successful single store to a global empire was the vision of Ray Kroc. He keenly realized that what he had franchised was not a hamburger shop, but a “business algorithm” that could be infinitely replicated. To ensure that this algorithm could be executed without compromise in every franchise store, Kroc presided over the writing of an operations and management manual that was hundreds of pages thick and was constantly supplemented in the future. This manual, revered by the franchisees as the “Bible” of McDonald’s, was the personification of McDonald’s Equilibrium Force, the “supreme law” within its organization.

The level of detail in this manual is enough to suffocate anyone who pursues a free spirit. It stipulated, in an unquestionable, engineer-like language, every detail of the operation: the fat content of the beef patty must be precisely nineteen percent; the diameter of the patty must be 3.875 inches, and the thickness 0.221 inches; the thickness of the onion slices must not exceed 0.125 inches; every slice of cheese must be placed in the exact center of the patty; fries that were not sold within seven minutes of being fried must be thrown away. It even stipulated the behavior of the employees: at the counter, they must smile and make eye contact with the customers; the direction of mopping the floor must be from the inside out, to ensure that dirt is not brought into the clean area. As the sociologist George Ritzer analyzed in his book The McDonaldization of Society, the core of this model is four dimensions: efficiency, calculability, predictability, and control through non-human technology. This system aims to create a highly rationalized system that minimizes human subjectivity to ensure the absolute consistency of the result.【Note: Source: Ritzer, George. The McDonaldization of Society. Translated by Xie Lizhong et al., Peking University Press, 2010.】

Now, let’s deconstruct this system with the Four Forces Compass. McDonald’s global franchise model is undoubtedly an extremely powerful “Expansionary Force.” However, this Expansionary Force is inherently accompanied by a huge “Contractionary Force” risk. Every independent franchisee has its own interests and management inertia. They may cut corners to reduce costs, and may, due to negligent management, lead to a decline in hygiene. The service flaws of any single store will cause irreversible damage to the entire brand. This loss of quality control due to scale expansion is a typical manifestation of organizational “entropy increase.”

And the entire standardization system of McDonald’s is precisely the largest, most precise “Equilibrium Force” machine in history, designed to combat this powerful “entropy increase” Contractionary Force. The thick manual is the “operating guide” for this machine. And to ensure that the guide is strictly followed, McDonald’s also founded the famous “Hamburger University.” This corporate training institution in Chicago is known as the Harvard of the fast-food industry. It does not teach profound theories, but focuses on one thing: to accurately “clone” the operational philosophy and standardized processes of McDonald’s into the brains of every franchisee and restaurant manager from all over the world. The existence of Hamburger University ensures that McDonald’s Equilibrium Force can be equally and without loss replicated to every corner of the globe along with the extension of its Expansionary Force.

Of course, this ultimate balance also came at a corresponding price. It, at the premise of sacrificing the creativity and autonomy of the employees, created a highly homogeneous, and even arguably monotonous, work environment. This, and the Haidilao model we analyzed earlier, form two completely opposite philosophical paradigms of “balance.” Haidilao achieves a dynamic balance of “customer satisfaction” by liberating the process. McDonald’s, on the other hand, achieves a balance of “product and experience” by locking down the process.

Ultimately, the McDonald’s hamburger empire became the ultimate totem of twentieth-century standardization Equilibrium Force. It proved to the world that through an uncompromising pursuit of the standardization of “results,” an organization can consistently fulfill its brand promise in hundreds of thousands of different locations, by millions of different employees, in billions of service interactions. This stability, which has traversed geography, culture, and time, is in itself an awe-inspiring, great organizational achievement. What it represents is precisely the powerful Equilibrium Force, with order, rules, and reason at its core, aimed at bringing the world into a controllable system.

(2)Toyota’s Lean Production: The Ultimate Optimization of “Process”

If the McDonald’s empire built an impregnable fortress of standardization on a global scale through the ultimate locking of “results,” then Japan, in the Eastern Hemisphere, at almost the same time, with a completely different philosophical speculation, gave birth to another form of equally powerful, and even more evolutionarily potential, “Equilibrium Force” paradigm. The creator of this paradigm was Toyota. What it built was no longer a precision machine aimed at perfectly replicating “static results,” but an “organic life form” that could self-learn, self-repair, and infinitely approach “dynamic perfection.” Its core was no longer the mandatory regulation of results, but the ultimate optimization of “process.”

We also need a “historical documentary-style restoration” perspective to deeply understand the inevitability of the birth of the Toyota Production System (TPS). Its cradle was not the fertile soil of post-war America, full of optimistic consumerism, but the defeated nation of Japan in the mid-twentieth century, a nation with extremely scarce resources, a destroyed industrial base, and a pitifully small domestic market. The pioneers of Toyota, such as Kiichiro Toyoda and Taiichi Ohno, faced a cruel reality: they could by no means afford to dilute costs through mass production (the so-called “Ford model”) like the auto giants in Detroit. Because mass production inevitably leads to a large amount of inventory, and in an environment where capital and materials are extremely scarce, any form of inventory is not an asset, but a fatal “waste” that can drag down an enterprise.

It was precisely this survival pressure, of being pushed to the edge of a cliff, that forced Toyota to think about a fundamental question: is there a production method that can have both the flexibility and high quality of custom craftsmanship, and the low cost and high efficiency of mass production, but without the huge waste brought by mass production? The answer to this question ultimately gave rise to the great revolution that was later called “lean production.” The core of this revolution is to build a powerful “Equilibrium Force” that can continuously and self-drivingly declare war on the organizational “entropy increase” force of “waste.”

The first pillar of this Equilibrium Force is “Just-in-Time” (JIT) production. This is a concept that sounds simple, but fundamentally subverts the entire logic of industrial production. In the Fordist “push” production, the upstream process just produces as many parts as possible according to the maximum capacity and “pushes” them to the downstream process. The result is inevitably the accumulation of mountains of work-in-progress inventory at various stages of the production line. Taiichi Ohno, inspired by the shelf-stocking model of American supermarkets, created “pull” production. Its core is that the upstream process only starts producing the required parts when the next process truly needs them, no more, no less, just like a customer taking a bottle of milk from the shelf will trigger a restocking order from the back warehouse. This pull is transmitted through information cards called “Kanban.”【Note: Source: Ohno, Taiichi. Toyota Production System: Beyond Large-Scale Production. Translated by Li Yingqiu, China Railway Publishing House, 2006.】

The profundity of JIT is that it does not just eliminate the most obvious waste of inventory. It is like a ruthless doctor who, by draining the excess “fat” (inventory) from within the organization, makes the deeper “lesions” that were covered by the fat—such as equipment failures, defective products, and process bottlenecks—unavoidably exposed. In a factory full of inventory, if a machine breaks down, the downstream process can temporarily rely on the inventory to maintain production, and the problem is covered up. In the JIT system, however, a halt in any one link will immediately cause a “shock” to the entire production line. This “a single hair can move the whole body,” highly coupled fragility, in a “forcing” way, compels the entire organization to immediately solve any minor problem that is exposed, thereby achieving a higher level of, waste-free, flowing balance.

The second, and more philosophical, pillar of this Equilibrium Force is “Jidoka.” Please note that the “dō” (働) here is a Japanese kanji with a “person” radical on the side. Behind it is the profound concept of “automation combined with human wisdom.” Its origin can be traced back to the automatic loom invented by Toyota’s founder, Sakichi Toyoda. That machine had a clever design: once any thread broke, the machine would automatically stop running, thus avoiding the production of a large number of defective products. This seemingly simple “machine that can automatically stop when an abnormality occurs” was developed by Taiichi Ohno and others into the soul of the Toyota Production System.

In a Toyota factory, every machine is given the ability to judge “normal” and “abnormal.” More importantly, every worker is granted a supreme power—to pull the rope above their head, called the “Andon” cord, and instantly stop the entire production line. This would be an unimaginable “great treason” in a traditional, output-only-oriented factory. But in Toyota’s culture, this is the most praiseworthy, responsible behavior. Because the philosophy of “Jidoka” believes that producing a defective product is a much greater loss than a short pause in the production line. It requires that quality must be built into the production “process” by every employee and every machine, and must never rely on post-mortem “inspection.”

Now, let’s once again place Haidilao, McDonald’s, and Toyota, these three seemingly unrelated cases, side by side under our analytical framework. All three have built a powerful organizational “Equilibrium Force,” but their underlying philosophical assumptions and implementation paths are clearly distinct.

   McDonald’s Equilibrium Force is “distrust of people.” It ensures the stability of the result by depriving people of their judgment.

   Haidilao’s Equilibrium Force is “trust in human nature.” It achieves a dynamic balance of customer needs by giving people power that transcends their positions, thereby stimulating their goodwill and creativity.

   And Toyota’s Equilibrium Force is “respect and awe for human wisdom.” It is not simply about empowerment. Through the “Jidoka” and “Andon” systems, it gives the power to discover problems and “stop” the system to the frontline employees. At the same time, through the core culture of “Kaizen” (continuous improvement), it also gives them the responsibility to solve problems and optimize the “process.” At Toyota, every employee is regarded as the “expert” and “master” of their process. They are encouraged, and even required, to constantly think: “Can I make this action 0.5 seconds faster today? Can the placement of this part be more reasonable to reduce the waste of one turn?”

This infinite “fussiness” about the “process” ultimately builds a unique “Equilibrium Force” full of “Evolutionary Force.” McDonald’s manual is a static “code of law” that needs to be updated by the headquarters. Toyota’s “standard work,” on the other hand, is a dynamic, “living knowledge” that is constantly being broken and optimized by frontline employees in their daily practice. As the MIT scholars James P. Womack et al. pointed out in their landmark work The Machine That Changed the World, the fundamental reason why lean production was able to defeat traditional mass production is that it perfectly integrated the two traditionally separate functions of “execution” and “innovation” into every job position.【Note: Source: Womack, James P., et al. The Machine That Changed the World. Translated by Zhao Ling et al., The Commercial Press, 2007.】

Ultimately, Toyota’s lean production became the most influential intellectual system for global manufacturing in the latter half of the twentieth century. The Equilibrium Force it represents is no longer just a “defensive” force that maintains stability and combats entropy increase. By implanting the gene of “continuous improvement” into the core of the equilibrium system, it has made this Equilibrium Force itself become an “offensive” force that drives the organization to continuously move forward with “negative entropy” and pursue perfection. What it has achieved is a higher-order balance—a dynamic harmony between stability and change, between order and innovation, between the efficiency of machines and the wisdom of humans, a harmony that seems contradictory but is in fact complementary.

Section 4: The Evolutionary Force: The Ultimate Code for Change, Learning, and Traversing Cycles

I. The “Second Curve” of an Organization: The Courage for Self-Revolution

(1)Charles Handy’s S-Curve and the “Curse of Success”

In our “Four Forces Compass,” the Expansionary Force, the Contractionary Force, and the Equilibrium Force together constitute the “regular” game field of an organization within a specific life cycle. The Expansionary Force drives the organization to grow upward, the Contractionary Force, like gravity, pulls it towards decline, and the Equilibrium Force tries to, between these two forces, prolong the plateau period as much as possible and maintain a stable existence. However, if history were merely a cycle of these three forces, then all organizations, and indeed all civilizations, would be doomed to be unable to escape the fate of decline after prosperity. They would be like the stars in the universe, which, after exhausting their fuel, inevitably collapse into white dwarfs or black holes, leaving only a cold remnant behind.

Fortunately, in the universe of organizations, there is a fourth force. It is like a technology that can “reboot” a star. It is not content to go to its end on a given trajectory, but attempts to, through a violent, risky “self-explosion,” ignite a brand new, longer-lived “new star.” This is the Evolutionary Force. It is a counter-intuitive force that requires great courage and foresight, a force that actively embraces uncertainty. And to understand the operating mechanism of this force, we must first introduce a thinker who can be called the “poet laureate of the management world”—Charles Handy,【Note: Charles Handy (1932-2024) was a British management thinker and author, widely regarded as one of Europe’s greatest management philosophers, on par with Peter Drucker. His thought is profound, philosophical, and humanistic, often exploring the future of organizations and individuals in elegant prose. His expositions on concepts like the “Second Curve” and the “Portfolio Worker” have been highly influential.】 and his “Second Curve” theory,【Note: This is a core theory proposed by Charles Handy. The theory states that any successful thing, whether it’s an organization, a product, or even a life, will go through a life cycle curve shaped like the letter S (the first curve), from a difficult growth period to a glorious peak, and finally an inevitable decline. To achieve sustained survival and development, an organization must, before the first curve reaches its peak, start a brand new, future-representing second curve that follows a different logic. This theory profoundly reveals the internal paradox and immense challenge of self-reform for successful organizations and is an important thought on organizational evolution and longevity.】 which is full of philosophical wisdom and practical warnings.

Handy, with his signature elegance and profundity, depicted the life trajectory of any successful organization, product, or even life as a simple S-shaped curve. This curve is divided into three clear stages. The first stage is the startup and learning period. At this stage, the organization invests heavily, but the returns are meager. The curve crawls slowly along the horizon. This is a “seeding period” full of trial and error, chaos, and uncertainty. The second stage is the growth and harvest period. Once the organization finds the right model, it will enter a “golden age” of high-speed growth. The curve climbs steeply towards the sky, and profits, market share, and organizational prestige all reach their peak. The third stage is the maturity and decline period. As the market saturates, technology iterates, or internal “entropy increase” intensifies, the organization’s growth momentum begins to be exhausted. The slope of the curve flattens, and finally, it turns irrevocably downward, heading towards decline.

This model in itself is not earth-shattering. It is just an accurate description of the natural law of “birth, aging, sickness, and death” in the business world. Handy’s truly disruptive insight lies in his proposing an incredibly cruel conclusion about “timing”: an organization, if it wants to achieve perpetual vitality, must, and can only, when the first S-shaped curve is still in its soaring, seemingly infinitely glorious peak period, or even before it reaches its peak, with unprecedented determination and courage, start a brand new, completely different, and uncertain “second curve.”【Note: Source: Handy, Charles. The Second Curve: Thoughts on Reinventing Society. Translated by Li Chu et al., CITIC Press, 2016.】

This is precisely the most counter-intuitive and most wisdom-testing aspect of the “Evolutionary Force.” It requires an organization to, at its most successful and least-in-need-of-change moment, proactively carry out a profound, painful, and even “self-cannibalistic” self-revolution. It requires a leader to, when the financial figures are at their brightest, when Wall Street analysts are singing praises, and when everyone is immersed in the joy of victory, stand up and play the role of the “crow,” to warn of a crisis that has not yet come, and to call on everyone to divert precious resources from the “cash cow” business that is wildly generating profits to a “new bet” that looks incredibly naive, has a very low rate of return, and may even seriously drag down the financial performance in the short term.

This is an almost impossible task. Because any successful organization will, at its peak, be firmly bound by an invisible yet incredibly heavy force. This force, we can call the “curse of success.” This is not a literary rhetoric, but the systematic “strangulation” of the nascent “Evolutionary Force” by the other three forces in our “Four Forces Compass,” when they have reached their extreme.

First, the inertia of the “Expansionary Force” itself constitutes the “motive” for the strangulation. When the business of the first curve is in its most lucrative phase, all the best talents, the largest budgets, and the most attention of the top management within the organization will be attracted by this powerful expansionary inertia. At this stage, “optimizing” and “expanding” the business of the first curve is the “rational” business decision with the highest return on investment. In comparison, the nascent “second curve” business is like a crying, “premature baby” that needs continuous blood transfusion. Before the cold financial statements, investing resources in such an uncertain future, rather than a certain present, looks like a betrayal, an irresponsibility to the shareholders.

Second, the already solidified “Equilibrium Force” constitutes the “tool” for the strangulation. To ensure the success of the first curve, the organization must have already established a perfectly matched, efficient “equilibrium system”—precise processes, strict KPI assessments, and a deeply rooted organizational culture centered on the core business. However, this once-meritorious “Equilibrium Force,” when faced with the “heresy” of the “second curve,” will instantly degenerate from a “stabilizer” to the coldest “strangler.” Using the KPIs (such as profit margin, market share) for evaluating a mature business to measure an innovative business that is still in its exploration phase is no different from using university exam standards to demand of a babbling baby. And the “muscle memory” and organizational culture that have long been accustomed to the ways of the first curve will instinctively reject, ridicule, and even attack the pioneers of the “second curve” who are trying to act according to a new, unfamiliar logic.

Finally, the inevitable “Contractionary Force” constitutes the “environment” for the strangulation. A successful organization will inevitably become large, and largeness will inevitably bring “entropy increase.” Bureaucracy begins to breed, departmental walls grow higher, communication costs rise sharply, and the tolerance for risk plummets. In such an organizational atmosphere of “the less trouble, the better,” the difficulty of promoting a “second curve” change, which is full of uncertainty, will inevitably touch the existing interest patterns, and in the short term, shows no clear returns, is imaginable. It requires not only strategic foresight, but also enormous political courage.

Therefore, the opening of the “second curve” is, in its essence, a “rebellion” of an organization against its own “success.” It is a life-and-death struggle between “the me of today” and “the me of yesterday,” a blatant challenge of “future interests” to “present interests.” This also explains why the once-glorious names in business history—Kodak, Nokia, Yahoo—all eventually went to their doom. It was not that their leaders were not smart enough; on the contrary, they were all top-tier business elites. They failed precisely because they were firmly “cursed” by the overly successful “first curve” that they had created. They saw the iceberg in the distance, but could not persuade themselves and the entire crew of the ship to, while the “unsinkable” Titanic was still holding an all-night party in the first-class cabin, immediately turn the ship’s head and sail into a seemingly colder, darker, and more dangerous unknown channel.

Charles Handy’s S-curve ultimately provides us with a cruel diagnostic framework for examining the “Evolutionary Force.” It tells us that evolution is never a “mending of the barn after the sheep have gone” that happens after decline has occurred. True evolution is a kind of courage, like a brave warrior cutting off his own wrist, to dare to “kill” a part of oneself at the peak moment. It is a profound, Eastern-philosophy-tinged wisdom—”what reaches its peak must decline, and what reaches its nadir will rebound.” An organization, only by deeply understanding the invisible, inevitable logical connection between “prosperity” and “decline,” can it, at the peak of “prosperity,” proactively sow the small but tenacious seed that leads to the next “prosperity.”

(2)The Trial of the “Valley of Death”: The Strategic Fortitude of a Leader

Charles Handy’s S-curve, with its elegant arc, points out the ideal timing for starting a “second curve.” However, the elegance of theory often highlights the cruelty of reality. In the vast, fog-and-swamp-filled no-man’s-land where the growth of the first curve has not yet ended and the growth of the second curve has not yet begun, lies the “valley of death” that an organization must traverse in its search for evolution. This is not a metaphor; it is a cold, real battlefield that has swallowed countless ambitious change plans. The only passport to cross this valley is not a more perfect business plan, nor a more accurate market forecast, but the seemingly lonely, stubborn, and even somewhat unreasonable “strategic fortitude” of the organization’s top leader.

The deadliness of the “valley of death” lies in its being not just a “return on investment” window in financial terms, but a concentrated outbreak of an “political vacuum” and “crisis of faith” within the organization. At this stage, the old heroes (the business of the first curve) are still powerful. They hold the most dazzling financial data and the largest internal resources of the moment. Their voices are loud and powerful in the boardroom and at performance review meetings. And the new pioneers (the business of the second curve) are like young soldiers with only promises and no military exploits. They are ragged and stumbling, and the only weapon in their hands is a “story” about the future that has not yet been verified. At this time, the “Expansionary Force,” “Equilibrium Force,” and “Contractionary Force” within the organization will, with one accord, form a powerful “holy alliance” to launch a ruthless siege on the weak newborn that represents the “Evolutionary Force.”

In my more than thirty years in the banking industry, I have successively worked in two highly representative national banks. For the sake of narration, let’s call them “Giant Bank A” and “Challenger Bank B.” These two banks, when faced with almost the same technological wave and market changes, because of the completely different strategic fortitude of their top leaders, ultimately went to completely different fates. Their stories provide us with the most real “clinical sample” for dissecting the cruel ecosystem within the “valley of death.”

“Giant Bank A” was the institution where I worked in the middle of my career. It was a typical industry leader that had achieved great success through its first curve. Its “first curve” was the traditional corporate credit business, centered on large and medium-sized enterprises and with collateral as the main risk control method. This business line, in the golden age of China’s high-speed economic growth, brought it rich and stable profits. Within the bank, a near-perfect “Equilibrium Force” system had been established around this curve: a strictly hierarchical account manager system, an extremely complex credit approval process, and an organizational culture that advocated “prudence” and “zero risk.”

About a decade ago, when the wave of internet finance was just beginning, the bank’s top leader, a highly visionary chairman, keenly realized that the business model of only serving “giants” would, in the future, be subverted by new species that could serve a massive number of “ants.” He, against all odds, decided to start the bank’s “second curve”—to establish an independent “Digital Finance Business Unit,” directly under the head office, aimed at using big data and online methods to open up the small and micro enterprise loan market, which was regarded as a “forbidden zone” by traditional banks.

This decision, at first, received the polite applause of the board and management. However, when this new department, representing the “Evolutionary Force,” really began to operate, the hideous face of the “valley of death” quickly showed itself.

First, was the battle for resources. The Digital Finance Business Unit was a typical “cash-burning” business. It needed to invest heavily to build a new technology platform, to hire data scientists and internet talents from outside at high salaries, and to purchase expensive external data sources. However, these investments could not see any profit returns in the short term. At the same time, the corporate banking department, as the “first curve,” could, with large loan projects with clear returns and controllable risks, apply for credit lines and expense resources from the head office. At every quarterly budget review meeting, I could feel the silent but extremely tense confrontation. The chief financial officer would, with cold data, question the head of the Digital Finance Business Unit: “You have lost tens of millions of yuan again this quarter. But if I approve these funds as expenses for the corporate banking department, they could at least bring us hundreds of millions in new loans and tens of millions in net profit. Please tell me, how am I supposed to explain this to the board and the shareholders?”

This is the first trial of the “valley of death”: judging the possibilities of the future by the standards of past success. This is almost irrefutable within an organization. Because on one side are the certain, immediate, and huge interests, while on the other side are the uncertain, distant, and small hopes.

Next, was the “unsuitability” of the assessment system. The bank’s “Equilibrium Force” system was built around the business logic of the first curve. We were accustomed to using mature indicators such as “non-performing loan ratio,” “net interest margin,” and “return on capital” to measure the value of a business. And the core indicators of the Digital Finance Business Unit in its early stages were “number of active users,” “model iteration speed,” “data dimension richness”—these were like “internet jargon from another planet” to traditional bankers. At the annual performance appraisal, the financial data of this new department was bound to be a mess. According to the existing system, it should be rated as the worst grade, the person in charge should be demoted, and the team should be downsized. This is the second trial of the “valley of death”: the solidified “Equilibrium Force” is systematically “strangling” the new species whose “genes” do not match its own. As the management scholar Clayton M. Christensen revealed in his classic work The Innovator’s Dilemma, the well-managed, most-responsive-to-customer “good” companies, their perfect management processes and value systems are precisely the fundamental reason why they cannot embrace disruptive innovation.【Note: Source: Christensen, Clayton M. The Innovator’s Dilemma. Translated by Hu Jianqiao, CITIC Press, 2010.】

Finally, and most fatally, was the organizational culture’s rejection reaction. In the stately edifice of “Giant Bank A,” the corporate account managers were the “decent people” in suits and ties, frequenting high-end office buildings. The “tech geeks” in the Digital Finance Business Unit, in their T-shirts and jeans, spouting “iteration” and “grayscale testing,” were seen as a group of “barbarians” who didn’t understand finance and only knew how to burn money. I had heard, more than once, those senior credit approval officers complain to me, this risk manager, in private: “We work so hard, one loan at a time, to make a profit for the bank. They, on the other hand, are like a bottomless pit, burning all our money. In the end, it will definitely be a mess.” This deep-seated contempt and distrust, stemming from a cultural divide, constituted the deepest and most insurmountable chasm in the “valley of death.”

Under these three huge pressures, the chairman who had once championed the change began to find it difficult to move forward. Every time he fought for resources for the new department, he had to expend huge political capital. Every time he defended the new department’s losses at a performance meeting, he seemed pale and powerless. He became the Don Quixote charging alone at the windmills. In the end, after a change in the board of directors, faced with huge performance pressure, this former visionary compromised. The Digital Finance Business Unit was “integrated” into the traditional retail banking department, its independent budget and personnel rights were revoked, and its head resigned in disappointment. The seed of the “second curve,” which represented the future of the bank, was, on the eve of crossing the “valley of death,” completely submerged by the flood of the old world because it had lost the last protective barrier of the top leader.

In sharp contrast to this is the story of “Challenger Bank B.” The scale and profitability of this bank, at that time, were far from those of “Giant Bank A.” For this very reason, its top leader, a president known for his iron fist and decisiveness, had a stronger “sense of insecurity” and a more absolute internal authority. When he decided to start almost the same “second curve” business, the internal resistance he encountered was no less than that of “Giant Bank A.”

But he showed a completely different, awe-inspiring “strategic fortitude.” In resource allocation, he, in an almost “dictatorial” way, forcibly allocated a “strategic reserve” from the entire bank’s profits, for special use only, and no one was allowed to divert it. In assessment, he set up a completely independent, “growth-oriented” assessment indicator for the new business, which was unrelated to profit, and personally served as the head of the evaluation team, clearly declaring to the entire bank: “This department, for the first three years, is not for profit, but only responsible to me and the future.” And in culture, he repeatedly, in various internal meetings, set up the pioneers of the new business as the “heroes” and “meritorious officials” of the bank’s future, and personally stood up for them, suppressing the “conservatives” who openly expressed doubts.

This process was painful and lonely. The president, for several years, bore huge performance pressure and internal criticism. But it was precisely this unquestionable “fortitude” that held up a crucial “protective umbrella” for the fragile seed of the “second curve,” allowing it to tenaciously survive the cruel storms of the “valley of death.” In the end, when the market environment reversed and the growth space of the traditional business was compressed, the second curve, which had been so coldly treated, had grown into a towering tree that could provide shelter for the entire bank.

Therefore, the trial of the “valley of death” is, in the final analysis, the ultimate test of the “strategic fortitude” of an organization’s top leader. This fortitude does not come from a blind faith in data, because in the valley, all the data is ugly. Nor does it come from a simple trust in subordinates, because in the valley, all teams will experience confusion and frustration. This fortitude is almost a pure, powerful “willpower,” originating from the top leader’s personal cognition and belief. It is the ability to see a future that does not yet exist, through the current financial statements. It is the courage to vouch for an uncertain possibility with one’s own career. And it is the sense of responsibility to, when the entire organization is in doubt and wavering, still be able to firmly and lonely tell everyone, “Trust me, follow me.” This is the one and only, and most fundamental, catalyst for the “Evolutionary Force” to, from a fragile spark within an organization, finally grow into a great revolution.

II. The Learning Organization: Peter Senge’s Vision

(1)The “Learning Disabilities” of an Organization: Diagnosing the Inability to Evolve

In our preceding discussion, the launch of the “second curve” was depicted as a lonely and heroic expedition, driven by the powerful strategic fortitude of the top leader. However, a deeper question follows: why must the evolution of an organization rely on such a costly, chance-filled “heroism”? Is there a possibility to make “evolution” not a series of thrilling “external revolutions,” but an internalized daily habit and collective instinct of the organization? The answer to this question leads us to the second, and more fundamental, pillar of the “Evolutionary Force”—the ability to learn. And in this field, Peter Senge of MIT,【Note: An acclaimed American management scholar and systems thinking master, a senior lecturer at the MIT Sloan School of Management. He is renowned for his 1990 book The Fifth Discipline, in which he systematically proposed the concept of the “learning organization,” earning him the title “father of the learning organization.” His ideas have profoundly influenced modern organizational management and development theories.】 with his epoch-making masterpiece The Fifth Discipline,【Note: The full title is The Fifth Discipline: The Art and Practice of the Learning Organization, first published by Peter Senge in 1990. The book is hailed as one of the most landmark works in the field of management in the late 20th century. It systematically elaborates how an organization can transform into a “learning organization”—one that can continuously learn, adapt, and create its future—through five core disciplines: personal mastery, improving mental models, building a shared vision, team learning, and the core fifth discipline, “systems thinking.” The publication of this book marked a major shift in organizational management theory from a traditional control-oriented paradigm to a learning-oriented paradigm.】 has provided us with the most systematic and profound diagnostic and therapeutic plan.

Senge’s revolutionary contribution lies in his pioneering integration of the complexity thinking of “systems dynamics” with the wisdom of Eastern Zen, thereby elevating the examination of an organization from a “mechanical collection” of parts to a living “life system” composed of various interactive relationships. In his view, the fundamental reason an organization cannot evolve is not the lack of strategy or the scarcity of resources, but that in the depths of its “mental models,” it has contracted some fatal “mental disabilities” that prevent it from learning from experience. Senge, in a highly impactful, almost medical-diagnostic language, named these disabilities the “learning disabilities” of an organization.

This seemingly offensive term precisely captures the essence of the problem. “Disability” here does not refer to the low IQ of the organization’s members. On the contrary, many large companies on the verge of collapse are filled with the world’s top smart people. An organization’s “learning disability” means that as a “collective,” the organization has lost the ability to perceive reality, reflect on itself, and effectively change its own behavior accordingly. These “disabilities” are precisely the most hidden and most stubborn manifestations of the “Contractionary Force” in our Four Forces Compass, at the cognitive and cultural levels of an organization. They are like a powerful autoimmune system that will systematically attack and eliminate any budding “Evolutionary Force” that tries to change the status quo.

In my opinion, diagnosing these “diseases” is the first step in building an organization’s Evolutionary Force. Combining Senge’s theory with my years of management experience, the following “learning disabilities” are particularly common and fatal in large organizations:

The first, and most fundamental, disease is “I am my position.” This is a “cognitive tunnel effect” caused by the over-specialization of professional division of labor. Every member of the organization views the entire world from their highly specialized yet highly narrow “position” perspective. They are proficient in the tightening technique of the “screw” they are responsible for, but are ignorant and indifferent to the role this screw plays in the operation of the entire complex machine and its interactive relationship with other parts.

This disease is almost an epidemic in the banking industry where I have long worked. A loan officer will be obsessed with the growth of the loan portfolio because that is his most core KPI. He may instinctively see risk control as a “trouble” that hinders him from completing his task. And we, who are responsible for risk approval, tend to see all businesses as potential “sources of risk,” lacking enough empathy for the growth anxiety of the business departments. When an organization is cut into countless such “cognitive tunnels,” a systemic risk, concerning the overall health of the bank, quietly breeds in the cracks between the departmental walls. Everyone is doing their duty, but the organization as a whole is sleepwalking towards a cliff. This is the collective tragedy of “not seeing the forest for the trees.”

The second is “the enemy is out there.” This is a collective “psychological defense mechanism” built to escape self-reflection. When problems arise and performance declines, the first reaction within the organization is often not to look inward to examine its own strategic assumptions or operating procedures, but to look outward for a “scapegoat” that can be easily blamed. This “scapegoat” could be “fierce competitors,” “volatile regulatory policies,” “a weak macro-economy,” or even another department within the organization.

I have personally experienced such a laughable quarterly review meeting. A branch with a sharp decline in performance, its head had prepared a fifty-page report, analyzing in detail how “unreasonable” the economic structure of its region was, how “immature” the local customers were, and how the competitors were engaged in “vicious competition regardless of cost.” In his narrative, the branch itself was a pure, innocent “victim.” However, he avoided talking about his branch’s outdated branch layout, rigid service processes, and the low morale of its employees. When an organization gets used to defining itself as a “victim” of the external environment, it has fundamentally given up the “initiative” to change its own destiny. Evolution, then, is out of the question.

The third is a more deceptive disease—”the illusion of taking charge,” or what can be called the “fallacy of proactive action.” This disease often appears in companies with a strong “execution” culture. When a crisis occurs, the organization will immediately act, work overtime, and mobilize resources to “solve” the problem with an extremely “proactive” attitude. However, their so-called “solution” often only targets the “symptoms” of the problem, not the “root cause,” a kind of “digging a hole in the same place with more effort.”

Imagine a bank’s customer service center, where the number of customer complaint calls has surged in a short period. A typical “fallacy of proactive action” is to immediately add manpower and budget to the customer service center to ensure that every call can be answered more quickly and every complaint can be “handled” more quickly. The managers will be proud of their “decisive action.” However, a true learning organization will ask a deeper question: why have the complaints suddenly surged? Is there a fatal flaw in the design of one of our products? Or has a change in one of our business processes caused great trouble for our customers? “The illusion of taking charge” makes us obsessed with being an efficient “firefighter,” putting out one fire after another. True learning, however, requires us to be a calm “fire investigator,” to find the hidden, “structural” point of origin that caused all the fires.

Finally, there is the most classic and most alarming disease—the “boiling frog” analogy. It describes the collective “perceptual numbness” that an organization exhibits when faced with slow, gradual, yet fatal long-term threats. For sudden, violent crises, an organization can often burst forth with a strong stress response. But for the threats that are like the water temperature, quietly rising at a rate of 0.1 degree per month, the organization’s “alarm system” often completely fails.

The sudden collapse of Nokia is the business specimen of this frog being boiled alive. The threat of the smartphone did not appear overnight. From the release of the first-generation iPhone, to the rise of the Android system, to the final collapse of Nokia, there was a “water temperature rising period” of several years. During this period, countless engineers and middle managers within Nokia had issued warnings, but the entire organization’s decision-making level was numbed by the still-huge profits and market share of its feature phone business (the first curve). They felt the change in water temperature, but could never persuade themselves to believe that this “small commotion” would be a disruptive tsunami. They ultimately, in the comfortable warm water, lost the last chance to jump out of the pot.

These four “learning disabilities”—the narrowness of “I am my position,” the buck-passing of “the enemy is out there,” the superficiality of “the illusion of taking charge,” and the numbness of “the boiling frog”—they together constitute the most core “pathological slice” of an organization that cannot evolve. They are not isolated management mistakes, but a set of interrelated, mutually reinforcing “systemic diseases.” An organization, if it cannot clearly diagnose which “learning disabilities” it has, and to what extent, then any grand blueprint for a “second curve” will just be a castle built on sand, unable to withstand the first wave of reality. And diagnosis is just the first step. Next, we will discuss the systematic “prescription,” composed of the “five disciplines,” that Peter Senge has prescribed to cure these “chronic diseases.”【Note: Source: Senge, Peter M. The Fifth Discipline: The Art and Practice of the Learning Organization. Translated by Zhang Chenglin, CITIC Press, 2018.】

(2)The Five Disciplines: A Systematic Methodology for Building an Organization’s “Evolutionary Force”

Faced with the “learning disabilities” that are deeply rooted in the organization’s body, any “management trick” that “treats the head for a headache and the foot for foot pain” is doomed to be futile. Peter Senge’s profundity lies in his clear recognition that these diseases do not exist in isolation, but are an interrelated, mutually reinforcing “systemic disease.” Therefore, the prescription he gives is necessarily a “systemic prescription” composed of five ingredients, which need to be cultivated simultaneously and are indispensable. This is the famous “Five Disciplines.” They are not five independent management tools, but a complete set of “mental methods” aimed at fundamentally reshaping the way organizational members think and interact. They are the most core systematic methodology for building an organization’s “Evolutionary Force.”

The first discipline is “Personal Mastery.” This is the cornerstone of the five disciplines, and also the “internal skill” concerning individual cultivation that is most easily overlooked by managers. The “personal mastery” Senge speaks of is not the pursuit of some transcendent state, but a discipline of continually “clarifying and deepening our personal vision, of focusing our energies, of developing patience, and of seeing reality objectively.” It requires every member of the organization to first become an independent, clear-eyed “learner.”

This fundamentally challenges the traditional organization’s definition of an employee. In a traditional bureaucracy, an employee is an appendage of a “position,” a “tool man,” whose primary duty is to “execute.” “Personal Mastery,” on the other hand, advocates that an organization must be composed of individuals who have a deep commitment to their own growth. Because an organization’s ability to learn can never exceed the sum of the learning ability of its members. When the individuals in an organization are accustomed to viewing work as a “dojo” for realizing their personal vision and honing their minds, and not just as a “transaction” for a salary, a powerful, bottom-up source of “Evolutionary Force” is truly opened. This is the fundamental remedy for the first “learning disability” of “I am my position.” It requires us to shift our gaze from the narrow job responsibilities to the broader, ultimate question of “who I want to become.”

The second discipline is “Improving Mental Models.” If “Personal Mastery” is an inward self-cultivation, then “Improving Mental Models” is an inward, brave self-interrogation. It requires us to ruthlessly “expose to the sunlight” and examine the “assumptions, generalizations, or even pictures or images that influence how we understand the world and how we take action,” which are hidden deep in our consciousness.

This is precisely the “scalpel” for curing the chronic disease of “the enemy is out there.” Because the root cause of our habit of looking for enemies outside is precisely that we have never examined the already solidified “world map” in our hearts. On this map, we ourselves are often rational and well-intentioned, while “others” (competitors, other departments) are irrational and even malicious. The discipline of improving mental models is to require us to bravely admit that “the world we see is not the world itself, but just a map we have drawn, a map full of subjective biases,” and to be ready at any time to listen to the different views of others to correct our imperfect map.

In the difficult journey of transformation from traditional corporate business to the “second curve” of digital finance that I have personally experienced, what most needed to be broken was precisely the deeply ingrained “mental model” in the hearts of bankers—”all small and micro enterprise loans are high-risk and unprofitable.” This model, in the past few decades, had been a correct and effective “risk control rule.” However, when the technological and data environment underwent a dramatic change, this former “truth” became the “ideological shackle” that prevented us from seeing the new continent. Only when we collectively and consciously took out this “mental model” for an open, frank inquiry and debate could new possibilities emerge.

The third discipline is “Building a Shared Vision.” When individuals begin to transcend themselves and teams begin to examine their mental models, a crucial question arises: where is this collective heading? The “shared vision” Senge speaks of is by no means the magnificent but empty “mission statement,” carefully crafted by the public relations department and hung on the wall of the meeting room. A true shared vision is a “specific, vivid picture” of “what we want to create together in the future,” a picture that can be rooted in the heart of every member of the organization.

It must be “jointly built,” not “unidirectionally instilled.” What it inspires is a long-term “commitment” from the heart, not a short-term “compliance” based on fear or interest. This is precisely the most powerful “centripetal force” against the “loss of focus” problem, which is at the core of organizational “entropy increase.” When a shared vision that is clear enough and attractive enough can, like the North Star, hang high in the sky of the organization, it can calibrate the “Expansionary Force” of countless individuals from chaotic, and even conflicting, directions into a unified, powerful combined force. It allows the members of the organization, when faced with daily trivialities and setbacks, to lift their heads and see a grander meaning beyond personal interests, thereby gaining the strength to move forward with resilience.

The fourth discipline is “Team Learning.” This is the “crucible” that sublimates the first three disciplines from the individual level to the collective level. The core of team learning is to develop a collective thinking ability called “dialogue.” This is completely different from the “debate,” full of win-lose confrontation, that we are familiar with in our daily lives. The purpose of “debate” is “my view must defeat your view.” The purpose of “dialogue,” however, is “let’s jointly suspend our respective views and, like partners, explore a deeper truth that none of us has seen before.”

This requires team members to show great openness and listening ability. It is precisely the most concrete practice field for breaking down “departmental walls” and curing the chronic disease of “I am my position.” In a true learning team, members from different functional departments will no longer be the “gatekeepers” of their respective interests, but the “puzzle solvers” jointly facing a complex problem. Everyone contributes their unique yet incomplete “piece of the puzzle,” and with an open mind, tries to understand the “puzzle pieces” of others, and finally, jointly pieces together a picture that is far more complete and closer to the “system as a whole” than any individual has seen.

And what integrates all this and gives it a soul is the crown of Senge’s thought—the “Fifth Discipline”: “Systems Thinking.” This is the most important and most difficult discipline to master. It is a new “lens” for observing the world. It requires us to no longer see the world as a series of isolated, linear “causal events,” but as a complex, dynamic “system” composed of countless interconnected, mutually influencing “feedback loops.”

Systems thinking is the one and only “antidote” for curing the two fatal chronic diseases of “the illusion of taking charge” and “the boiling frog.” It allows us to penetrate the dazzling “symptoms” to see the “structure” hidden behind the symptoms, the structure that drives the operation of the entire system.

Let’s return to the example of the surge in customer service complaints at the bank. A non-systems thinker sees the linear causality of “too many complaint calls, so we need to add more operators.” A systems thinker, on the other hand, will draw a more complex “system loop diagram”: perhaps it is precisely because we, in pursuit of short-term profits (Expansionary Force), oversimplified the risk disclosure process for a certain wealth management product (Equilibrium Force failure), that led to customer misunderstanding and loss, which in turn triggered the surge in complaints (Contractionary Force manifestation). And if we just add more operators without fixing the “structural” root cause of the flawed “product process,” then the more resources we invest in “firefighting,” the more we are condoning the fire to continue to burn.

Systems thinking allows us to see that today’s “problems” are often the result of yesterday’s “solutions.” It teaches us to look for the high-leverage “fundamental solutions” that can “move the whole body with a single hair,” rather than being obsessed with the low-leverage, palliative “symptomatic solutions.”

Ultimately, these five disciplines form an inseparable, mutually reinforcing whole. Personal Mastery provides the “spiritual energy” for the entire system. Improving Mental Models clears the “cognitive obstacles” for us. Building a Shared Vision points out the “direction forward” for us. Team Learning provides us with the method for “collective navigation.” And Systems Thinking is the “nautical chart” that integrates all this and guides us through the fog of complexity. They together constitute the “software” and “operating system” of an organization’s “Evolutionary Force.” They are the most fundamental, and only, path of cultivation for an organization to evolve from a “machine” that passively responds to change to a “living organism” that can proactively create the future.【Note: Source: Senge, Peter M. The Fifth Discipline: The Art and Practice of the Learning Organization. Translated by Zhang Chenglin, CITIC Press, 2018.】

III. Antifragility: Gaining Strength from Uncertainty

(1)Taleb’s “Triad”: Fragile, Robust, and Antifragile

If Charles Handy’s “second curve” revealed to us the courage for “self-revolution” that an organization should display when facing a “predictable” life cycle, and Peter Senge’s “five disciplines” provided us with a “internal system” for continuous learning to cope with “understandable” complexity, then we must now face the fact that the world we live in is, to a large extent, neither predictable nor fully understandable. It is more like a “chaotic field” driven by countless “black swan” events, a field full of randomness, volatility, and extreme shocks.

In such a world, merely having the ability to “learn” may not be enough to ensure long-term survival. Because learning often takes time, and a sufficiently violent “black swan” shock may not give the organization any time to learn and react. Therefore, we need a higher-order, more survivalist “Evolutionary Force.” This force must not only be able to “resist” shocks, but also to “draw” nutrients from shocks and chaos, to make itself stronger. The one who has precisely “named” and systematically “portrayed” this mysterious force is the maverick thinker, former trader, and contemporary king of risk philosophy—Nassim Nicholas Taleb.【Note: Nassim Nicholas Taleb is a Lebanese-American essayist, mathematical statistician, former risk analyst, and options trader. He is famous for his “Incerto” series of books on randomness, uncertainty, and risk, which includes landmark works like The Black Swan and Antifragile. Taleb’s thought is known for its profound anti-traditional spirit, its sharp critique of modern risk management theories, and its drawing of wisdom from real-world extreme events, especially in financial markets.】

Taleb, with his usual, mercilessly sharp pen, has completely subverted our traditional cognition of “risk” and “survival.” He pointed out that we have long been trapped in a black-and-white, dualistic thinking trap. When we talk about how something responds to stress, we habitually think that the opposite of “fragile” is “robust” or “resilient.”【Note: The first and second states in Taleb’s “triad.” “Fragile” refers to a system that is harmed or breaks when exposed to volatility, stress, and chaos, like a porcelain cup. “Robust,” on the other hand, refers to a system that can resist shocks and maintain its original form, suffering no damage, like a boulder. Taleb’s core insight is that robust is not the true opposite of fragile; it is merely a neutral state because it does not benefit from the shock. And in the universe, there exists a third state beyond robust, which is “antifragile.”】 However, Taleb points out, with surgical precision, that this is a serious “lexical defect,” which has obscured a more important and more fascinating property in the universe.

To break this mental shackle, Taleb constructed a new “triad,” which, like a spectrum, clearly marks the three distinct states of things when faced with volatility and stressors.

The first state is “fragile.” This is the state we are most familiar with. Fragile things love peace and predictable environments, and they dislike, and even fear, any form of volatility, chaos, and shock. A carefully protected porcelain vase is a perfect metaphor for “fragile.” In a museum with constant temperature and humidity, it can survive for centuries. But a slight earthquake, or an accidental touch, will instantly shatter it into a pile of irretrievable fragments. At the organizational level, those organizations that are extremely dependent on a single market, a single customer, a single technology, or whose internal processes are so rigid that they do not allow for any deviation, have this “porcelain-like” fragility. Their balance sheets may look perfect in calm seas, but once an unexpected “industry earthquake” comes, they will shatter at the sound.

The second state is “robust.” This is the ideal state that we have traditionally admired and pursued. Robust things can, under a certain limit of impact, maintain their original form and function. They are not easily changed. A skyscraper built to the highest seismic standards is a symbol of “robust.” A magnitude-seven earthquake may make it shake violently, but after the quake, it will still stand tall, with its internal structure intact. At the organizational level, those organizations with sufficient cash reserves, diversified business layouts, and perfect risk contingency plans have this “skyscraper-like” robustness. They can “endure” most external shocks and continue their original business model after a crisis. This is undoubtedly a commendable survival ability, a high-level manifestation of the “Equilibrium Force” under extreme pressure.

However, Taleb’s revolutionary insight lies in his pointing out the limitation of “robustness.” Robust is merely “not being harmed.” In a shock, it at most maintains its original state. It has not gained any “benefit” from this shock. More importantly, even the most solid skyscraper has a “stress limit” it can bear. Once it encounters a super-earthquake that is once in a millennium and far exceeds its design limit (i.e., a “black swan” event), its end is still a catastrophic collapse. Robustness can resist “known” risks, but it cannot cope with “unknown,” extreme forms of risk.

Thus, Taleb proposed the earth-shattering other end of the spectrum—”antifragile.” This word, which he personally created, describes a mythical property that surpasses robustness. Antifragile things not only do not fear chaos and shocks, on the contrary, they gain the power to grow from volatility, uncertainty, and even errors and harm. They become stronger than they were before after being “attacked.”

The Hydra in Greek mythology, the nine-headed serpent, is the original image of “antifragile”—you cut off one of its heads, and it will grow two more ferocious heads. In the biological world, the human muscle is also a perfect “antifragile” system. You apply “pressure” to the muscle fibers through weightlifting, causing “damage” at a microscopic level, and the muscles, in the process of repairing this damage, will become thicker and more powerful than before. Our immune system is the same. By being exposed to a small amount of inactivated virus (a vaccine), the immune system is “shocked” and “challenged,” and in this process, it “learns” how to deal with a more powerful, real virus invasion, thus making the entire body healthier. Antifragility is the most core secret shared by all living, evolving life systems.【Note: Source: Taleb, Nassim Nicholas. Antifragile: Things That Gain from Disorder. Translated by Yu Ke, CITIC Press, 2014.】

Taleb’s “triad” provides us with a new and more profound dimension for examining an organization’s “Evolutionary Force.” It tells us that an organization, if it is only satisfied with building “robustness”—for example, by stocking up more cash and formulating thicker contingency plans—then it can, at most, become a “skyscraper” that survives most earthquakes. Its goal is still to “maintain the status quo.” And an organization that truly desires to have a strong “Evolutionary Force” must set its goal as the pursuit of “antifragility.” It must think about how to design its organizational structure, business model, and culture so that it can not only not collapse after encountering an unexpected shock, but can, like the mythical Hydra, “grow” new, more powerful “heads”—which could be new technologies, new market insights, new business models, or a more resilient organizational culture.

This is a fundamental shift in worldview. It requires us to no longer see “uncertainty” and “volatility” as “enemies” to be completely eliminated, but as “free nutrients” that are necessary, though painful, for the organization’s evolution. It requires a leader to transform from an “architect” who tries to build a perfect “static” fortress, to a “gardener” who carefully cultivates a complex “ecosystem.” A gardener will not try to eliminate all pests and storms; he understands that moderate pressure and challenges can make the plants in the garden grow more robustly.

With this, we have a more complete cognitive tool for diagnosing and building an organization’s “Evolutionary Force.” If the “second curve” theory points out the “direction” and “timing” of evolution, and the “five disciplines” of a learning organization provide us with the “mental methods” and “processes” of evolution, then Taleb’s “antifragile” theory establishes the “ultimate goal” and “highest standard” of evolution. This standard is: a truly evolutionary organization must be an “antifragile” organization. It no longer pursues being error-free in a predictable world, but is committed to continuously and systematically benefiting from errors and chaos in an unpredictable world. And this is precisely the core issue that we will explore in depth next, through a review of a risk event that I personally experienced.

(2)Benefiting from Shocks: A Case Review of a Personally Experienced Risk Event

In my years in charge of risk management at a branch, I have personally witnessed an industrial cluster fall from a state of fiery prosperity to an ice age overnight. It was a textbook “black swan” event, and also the most profound lesson of my career on the three words “antifragile.” This story is not about an isolated enterprise, but an ecological slice of a regional economy. It vividly shows how, when a huge “Contractionary Force” descends with an irresistible posture, the true “Evolutionary Force” is awakened.

The story took place in a major manufacturing town on the eastern coast of my country. In the first decade of this century, it became famous for the sudden rise of the photovoltaic industry. Driven by the generous fiscal subsidy policies of Europe, especially countries like Germany and Spain, the global demand for solar panels showed an explosive growth. This powerful external “Expansionary Force,” like a warm monsoon, blew across every corner of this city. For a time, photovoltaic enterprises of all sizes sprang up like mushrooms after a rain. A complete industrial chain was quickly formed, from pulling single crystal silicon rods, to cutting silicon wafers, to packaging battery modules. Capital, talent, land—all factors of production rushed madly to this “hot spot” industry.

In this wave of mania, there was a company, let’s call it “Guanghua New Energy” (a fictional name), which was an undisputed star. Its founder, Old Li, was an entrepreneur who had started as a technician. He was rigorous, pragmatic, and had an almost obsessive pursuit of technology. I had led a team to his factory for pre-loan investigations and post-loan inspections many times. His workshop was always filled with the unique smell of heated silicon material. Rows of fully automatic laminating machines operated quietly and efficiently in a clean factory with constant temperature and humidity. What Old Li was most proud of was a fully automatic production line he had imported from Germany at a high price, whose photoelectric conversion efficiency was ahead of his domestic peers at the time.

The financial statements of “Guanghua New Energy” were perfect. Sales doubled every year, the profit margin was astonishingly high, the cash flow was abundant, and the accounts receivable turnover was also well controlled, because the payment credit of European customers was generally high. In our credit rating model, it was a top-tier customer, a “hot commodity” chased by all banks. Our branch was also deeply involved, providing it with a package of support from working capital loans to trade financing. In that era of soaring progress, it seemed that no one would doubt that this sun-drenched track would continue forever. Old Li’s dream was to become the world’s largest supplier of photovoltaic modules. This powerful “Expansionary Force” was reflected not only in his continuously expanding factories and growing orders, but also in the optimistic mood that permeated the entire region.

However, as a risk officer, my professional instinct made me always hold a trace of vigilance towards this “one-sided” prosperity. I had raised my concerns in risk review meetings many times: first, the lifeblood of the industry was almost entirely tied to the subsidy policies of a few foreign countries. Was the foundation of this business model, built on the “generosity” of others, solid? Second, the technological path was relatively singular. The entire industrial cluster was betting on crystalline silicon batteries. If there was a disruptive breakthrough in thin-film battery technology, how would we respond? Third, the expansion of the enterprises relied heavily on high leverage. The deep involvement of bank credit had created a “all-for-one, one-for-all” bond between the entire regional financial system and the photovoltaic industry.

Frankly speaking, at that time, my voice seemed a bit “out of step.” A colleague from the business department said to me half-jokingly: “Old President, are you being too conservative? This is a once-in-a-century opportunity. If we don’t seize it, others will.” His words represented the sentiment of the vast majority of people at that time. In the face of a huge “Expansionary Force,” the reverence for potential risks is often drowned out by the craving for short-term profits.

The market’s “Contractionary Force” finally descended in a more violent and more resolute way than I had imagined. In 2012, this huge “black swan” flapped its wings. First, was the “dual-anti” investigation (anti-dumping, anti-subsidy) launched by Europe and the United States. High punitive tariffs, like a high wall, instantly blocked more than ninety percent of the export market. Immediately after, European countries, due to their own sovereign debt crisis, sharply reduced and even cancelled their photovoltaic subsidies. The demand side was instantly frozen.

The impact was devastating. I still remember that autumn afternoon when I walked into that once-bustling industrial park again, what I saw was a dead silence. A large number of factories had stopped work, with court seals on their doors. Only a few were still struggling to survive. The once-arrogant bosses were now all downcast. Their mobile phones, which used to be hotlines for orders, had now become collection lines for banks and suppliers. The entire industry had fallen from a boiling point directly into a freezing point.

“Guanghua New Energy” was not spared. Overnight, the mountains of finished product inventory turned into worthless “bricks,” and every month they had to pay high storage fees for this inventory. Customer default letters came in like snowflakes, but the raw material procurement contracts that had already been put into production could not be cancelled. The company’s cash flow was instantly cut off. According to our bank’s disposal plan, it had already reached the worst situation where it needed to be immediately seized and liquidated. At the emergency risk meeting I presided over, the atmosphere was extremely oppressive. Almost all opinions pointed to the same conclusion: take legal action immediately, seize all of “Guanghua’s” assets, and recover as much as possible to minimize our bank’s losses. This was a completely correct and blameless decision from a “risk avoidance” perspective.

However, I ultimately vetoed this proposal. I made a decision that seemed extremely risky at the time: not to withdraw the loan, not to sue, but to lead a team myself to station in the enterprise and conduct “risk management.” This decision was not out of a momentary sympathy, but based on a calm judgment, a professional judgment to find the bud of “Evolutionary Force” in a crisis.

Before making this decision, I had an all-night conversation with Old Li. In the smoke-filled office, he did not complain about the ruthlessness of the market, nor did he beg for the bank’s mercy. Instead, he took out a thick stack of technical drawings, his eyes shining with an almost frantic light. He told me that in the two best years of the market, he had used his profits to secretly form a small R&D team and had been studying the technology of “distributed photovoltaics” and “energy storage integration.” He believed that over-reliance on large-scale ground power stations and exports was a dead end, and the real blue ocean of the future was on the roofs of thousands of households, achieving self-generation and self-consumption of electricity. This was a very advanced, and even somewhat fanciful, idea at the time.

It was this stack of drawings that made me see the spark of “Evolutionary Force.” I realized that the core asset of “Guanghua” was not the factories and equipment that were rapidly depreciating, but the future-oriented technological cognition that Old Li and his team possessed. My task was not to auction off the visible “hardware,” but to find a way to preserve and activate this invisible “software.”

Our bank’s “Equilibrium Force” intervened. But this was no longer a simple financial blood transfusion, but a profound, bone-scraping organizational reshaping. My team, including credit, legal, and financial experts, stationed in “Guanghua’s” factory for a whole month. What we did was far beyond the scope of a bank.

First, we led a cruel “asset slimming.” We helped Old Li to sell off most of his idle land and standardized production lines, retaining only the most core R&D equipment and one flexible production line. This process was painful. Old Li’s balance sheet shrank by two-thirds, but he obtained the most precious “ammunition” for the company to survive—cash. I told him it was like a gecko, in a critical moment, must abandon its tail.

Second, we conducted a thorough “debt restructuring.” We persuaded several other creditor banks to temporarily suspend their collections, and negotiated with all the suppliers to convert the short-term debt into a long-term “debt-for-equity” plan, turning the suppliers into “partners” of the enterprise. This greatly alleviated the company’s debt pressure, and more importantly, stabilized the morale of the entire supply chain.

Third, and most crucially, we provided precise financial support for his “Evolutionary Force.” We did not give him another penny to maintain the old production, but set up a special “R&D loan,” supervised by our bank, specifically to support the R&D, testing, and market promotion of his “distributed photovoltaic system.” The amount of this loan was not large, but every penny was used where it was most needed.

This process was the tempering process of an organization’s “antifragility.” The crisis, like a high-pressure furnace, destroyed the company’s fragile business model, which relied on external subsidies, but it also purified its truly solid, core-competency part. Old Li and his team, in that industry winter, burst forth with amazing creativity. The “photovoltaic-storage-charging” integrated home system they developed, because it precisely hit a market gap, soon received its first batch of orders. While their peers were still worrying about how to deal with the backlog of battery modules, “Guanghua” had quietly completed its transformation into a “solution provider.”

A few years later, with the explosion of the domestic distributed photovoltaic market, “Guanghua New Energy” not only miraculously survived, but was reborn from the ashes. Although its scale did not return to its peak, its profitability, technological barriers, and risk resistance were far superior to before. It was no longer a fragile, drifting OEM, but a truly “antifragile” organization that had mastered core technology and could define the market.

This case was also a profound “evolution” for myself and my team. We realized that the highest realm of a bank’s risk management should not be to be an ever-correct “weather forecaster,” accurately predicting the arrival of storms; nor should it be to be a sophisticated egoist, being the first to shut the doors and windows when a storm comes. True risk management is to be a brave “navigator,” who can not only identify storms, but also knows how to use the power of the storm to adjust the sails, and even to sail against the wind. It requires us to go deep into the texture of the industry, to perceive the “Evolutionary Force” genes that determine the life and death of an organization, behind the financial statements.

The I Ching says: “When a situation reaches its limit, it changes; change leads to passage, and passage leads to endurance.” This sentence perfectly explains the wisdom of “antifragility.” When an organization is pushed to the brink by the “Contractionary Force,” what it faces is both the end of its survival and the beginning of its evolution. Those organizations that dare to change and are good at learning in the midst of shocks will not only not be destroyed, but will draw nutrients from chaos and uncertainty, and gain a more powerful life force to traverse cycles.

IV. Case Studies: Microsoft’s Cloud Transformation and IBM’s Several Rebirths

(1)Microsoft’s “Turning the Elephant”: The Practice of a Learning Organization

In business history, few giant enterprises have been able to, after missing one era, still seize the next. More stories are the tragic songs of Kodak and Nokia: the kings of yesteryear, in the change of technological waves, collapsed due to the huge “Contractionary Force” generated by their massive bodies—organizational inertia, process sclerosis, and cognitive ossification. However, Microsoft, the company that had established an unshakable hegemony in the personal computer era, after once being considered a “laggard” in the mobile internet era, miraculously completed the “turning of the elephant” and, in the era of cloud computing and artificial intelligence, returned to the top of the world.

This miracle in business history did not originate from the accidental discovery of any new technology, but from a profound, top-down “Evolutionary Force” revolution of the organization. Its chief architect was Satya Nadella, who took over as CEO in 2014. What he did can be seen as the most successful and most thorough business practice of Peter Senge’s “learning organization” theory.【Note: Peter M. Senge, in his 1990 classic The Fifth Discipline: The Art and Practice of the Learning Organization, systematically proposed the five core skills or “disciplines” for building a learning organization.】 Nadella, in an almost textbook-like manner, injected the essence of the “five disciplines” into the massive and rigid body of Microsoft, ultimately awakening its dormant “Evolutionary Force.”

Before Nadella took office, the impression Microsoft gave to the outside world was like a rich but extremely arrogant “imperial rent collector.” Its “Expansionary Force” had been exhausted, replaced by a powerful but senile “Equilibrium Force.” Its core business model was to guard the huge “cash cow” of Windows, using its monopoly position on the PC side to license software. This model made it earn a fortune, but it also made it suffer from a serious “disease of success.”

During the era when Steve Ballmer was at the helm, the “Contractionary Force” within Microsoft had almost reached its peak. The most typical was its notorious “stack ranking” performance appraisal system. This system forced managers to rate employees according to a fixed ratio into several grades such as “top,” “excellent,” “average,” and “unacceptable.” This cruel internal competition, far from stimulating vitality, produced disastrous consequences. It turned colleagues into “zero-sum game” opponents, seriously damaged teamwork, and gave rise to thick “departmental walls.” Each business division was like an independent feudal kingdom, with strict barriers between them, full of “us versus them” antagonism. The Windows division looked down on the Office division, believing the latter was just a parasite on its platform. And these two “cash cow” divisions jointly despised the new businesses that were burning money and had no short-term returns in sight, such as cloud computing (Azure) and the Bing search engine.

This internal fragmentation and sclerosis directly led to Microsoft’s strategic defeat in the mobile internet era. When Apple’s iPhone and Google’s Android redefined personal computing, Microsoft was still stubbornly trying to crudely transplant the PC-era Windows model onto mobile phones. It spent a huge amount of money to acquire Nokia’s mobile phone business, only to end in a disastrous failure. This is a classic re-enactment of the “innovator’s dilemma” described by Clayton M. Christensen:【Note: Clayton M. Christensen, in his 1997 book The Innovator’s Dilemma, profoundly analyzed why well-managed, successful companies often fail to cope with disruptive innovation and are eventually eliminated by the market.】 a successful organization, its resources, processes, and values on which it relies for success will ultimately become the biggest shackles preventing it from embracing disruptive innovation.

In February 2014, when Satya Nadella, an Indian-American executive from the cloud computing department with a gentle and introverted personality, unexpectedly took the scepter, what he faced was such a “patient”: a giant with huge profits and strong technical reserves, but whose organizational culture was already terminally ill.

The “prescription” Nadella gave was not a drastic business restructuring, but a profound “mental revolution.” The first thing he did after taking office was to recommend a non-technical book to all employees—Marshall Rosenberg’s Nonviolent Communication.【Note: Marshall B. Rosenberg’s Nonviolent Communication: A Language of Life. The book advocates a communication model based on empathy, focusing on each other’s observations, feelings, and needs, with the aim of establishing a deep connection between people. Nadella’s move is widely regarded as the first shot he fired to repair the internal trust and collaboration culture of Microsoft, which was severely broken by the “stack ranking” system at the time.】 This, in Microsoft, whose core discourse was technology and business competition, was an earth-shattering move. The first strong signal he sent was: what we need to change, first, is the way we talk to each other. This is precisely a core part of the “five disciplines” of a “learning organization”: “Improving Mental Models.”

Nadella keenly realized that Microsoft’s biggest enemy was not Apple or Google, but the internal “fixed mindset” of thinking it knew everything. He began to, throughout the company, spare no effort to advocate a “growth mindset.”【Note: The American psychologist Carol S. Dweck, in her 2006 book Mindset: The New Psychology of Success, detailed the difference between a “fixed mindset” and a “growth mindset” and its profound impact. Satya Nadella was deeply influenced by this book and took it as the core theoretical basis for transforming Microsoft’s culture.】 He repeatedly conveyed a core concept to the employees: Microsoft must transform from an organization that “knows it all” to an organization that “learns it all.” This means encouraging curiosity, embracing “making mistakes,” admitting one’s own ignorance, and humbly learning from customers and competitors.

The most critical practice of this “mental revolution” was to abolish the much-criticized “stack ranking” system. In its place was a new performance system called “Connect.” The core of the new system was no longer to judge the individual performance of employees, but to evaluate how they, through collaboration, contributed to the success of others and the team, and what they learned from their own failures. This measure, like a surgical operation, precisely removed the “tumor” that caused the systemic necrosis of Microsoft’s internal collaboration, and greatly promoted “Team Learning.”

On the basis of “Improving Mental Models” and “Team Learning,” Nadella began to reshape Microsoft’s “Shared Vision.” He keenly captured the pulse of the times and redefined Microsoft’s mission from the vague “devices and services company” of the Ballmer era to: “to empower every person and every organization on the planet to achieve more.”

The beauty of this vision lies in its great inclusiveness and openness. It no longer regards Windows as the center of the universe, but takes “empowerment” as its core. This means that Microsoft’s tools and services can run on any device, on any platform, whether it’s Apple’s iOS or Google’s Android. Under Nadella’s leadership, Microsoft, for the first time, demonstrated its Office applications running smoothly on an iPad Pro at an Apple launch event. This scene was unimaginable in the past. It symbolized Microsoft’s complete farewell to the closed, arrogant imperial era and its embrace of an open, collaborative ecosystem.

With a new mental model and a shared vision, Nadella began to promote the most difficult “Systems Thinking” level of change. He strongly pushed the “mobile-first, cloud-first” strategy, which eventually evolved into “intelligent cloud and intelligent edge.” The essence of this strategy was a profound self-revolution, which required Microsoft to proactively “kill” its most profitable business.

He soberly realized that in the cloud computing era, the value of the operating system (Windows) was diminishing, while computing power and data itself were becoming the new core. He made an extremely difficult but crucial decision: to no longer invest precious resources in the doomed Windows Phone, but to bet the company’s future entirely on the cloud computing platform Azure. At the same time, he transformed the flagship software like Office from the past “one-time sale” model to a “subscription-based service” (SaaS). This allowed Office to break free from its dependence on Windows and become a cross-platform, continuously cash-generating powerful engine.

This was precisely the thrilling leap to start a “second curve” as described by Charles Handy. Under Nadella’s leadership, Microsoft bravely crossed the “valley of death” from a “product company” to a “platform and service company.” Azure’s revenue grew from negligible when Nadella took office to become the core engine driving Microsoft’s growth, making it the only player that could compete with Amazon Web Services (AWS) in the new trillion-dollar track of cloud computing.

Finally, the foothold of all these changes was to stimulate the “Personal Mastery” of every individual in the organization. The “empathy” advocated by Nadella was not just a moral posture, but a business strategy. He required all product managers and engineers to go out of the office to listen to the real needs and pain points of customers. He believed that only by truly understanding the desires of customers can great products be created. This respect for and stimulation of individual creativity and potential allowed Microsoft to once again attract the world’s top AI talents, laying a solid foundation for its renewed leadership in the artificial intelligence era.

Looking back at Microsoft’s “turning the elephant,” we can clearly see a practical path of a “learning organization”: starting from changing the “mental models,” breaking down departmental walls through promoting “team learning,” under the guidance of a “shared vision,” carrying out a “systems thinking” level strategic transformation, and finally landing on stimulating everyone’s “personal mastery.” The greatness of Satya Nadella lies not in his inventing any earth-shattering management theory, but in his, like a patient gardener, using the blueprint already drawn by Peter Senge, to re-cultivate a vibrant, self-evolving tropical rainforest on the once-compacted soil of Microsoft. The rebirth of Microsoft is the most magnificent chapter of “Evolutionary Force” triumphing over “Contractionary Force.” It eloquently proves that for an organization, the ability to learn is the ultimate core competency.

(2)IBM’s “Century of Solitude”: An Epic of the Evolution of Antifragility

If the business world had its own “pantheon of gods,” then IBM would undoubtedly be one of the oldest and most solitary deities. It was born in the era of punched cards and mechanical computing, witnessed the faint light of vacuum tubes, the roar of mainframes, the wave of personal computers, the rise of the internet, and today’s cloud and artificial intelligence. In its long life of more than a century, most of its former rivals have long since vanished, turned to dust in the history of business. Only it, like a lonely time traveler, clad in blue armor, still stands today.

This “century of solitude” stems from a profound “antifragile” ability that has been integrated into its bloodstream. The history of IBM is an epic of constantly and proactively embracing “black swans,” even to the point of killing “the me of yesterday” with its own hands, thereby achieving one nirvana after another on the brink of destruction.

IBM’s first great rebirth was led by its soul figure, Thomas Watson Jr.【Note: Thomas John Watson Jr. (1914-1993), the second CEO of IBM, hailed as “the greatest capitalist in business history.” He led IBM into the computer age, and his boldest decision was to invest heavily in the development of the System/360 mainframe, which established IBM’s dominance for the next few decades.】 In the early 1960s, IBM had already established a dominant position in the commercial computer field with its first-mover advantage. But its product line was complex, and different models of computers were incompatible with each other. This was both a source of its profits and constituted a huge organizational “entropy increase.” Watson, with amazing foresight and courage, made a bet that can be called the most audacious in business history: to abandon all existing product lines and pour all the company’s efforts into investing five billion dollars (which at the time exceeded the “Manhattan Project” for developing the atomic bomb) to develop a brand new, fully compatible computer system—the System/360.

This decision met with huge internal resistance at the time. It meant proactively destroying the company’s profitable business to chase an uncertain future. This was the first head-on battle between the “Evolutionary Force” and the “Contractionary Force.” Watson’s “antifragile” thinking lay in his realization that if IBM did not proactively replace its chaotic product line with a unified, advanced architecture, then its competitors would sooner or later do so. It was better to proactively self-disrupt than to be passively disrupted. The success of the System/360 not only opened a thirty-year golden age of mainframes for IBM, but more importantly, it implanted a cultural bud of “creative self-destruction” into IBM’s genes.

However, great success also breeds the seeds of the next crisis. By the late 1980s, IBM, this blue giant, had become bloated, arrogant, and bureaucratic due to its unparalleled success. It was immersed in the rich profits brought by mainframes, missed the minicomputer revolution, and in the personal computer (PC) market that it had personally nurtured, it handed over the two most core values of the operating system and the chip to Microsoft and Intel respectively. When the wheels of history rolled into the 1990s and the ice age of mainframes descended, with minicomputers and PC servers besieging it like a pack of wolves, IBM’s “Contractionary Force” broke out with unprecedented intensity.

From 1991 to 1993, IBM’s cumulative losses reached an astonishing sixteen billion dollars, its stock price plummeted, and tens of thousands were laid off. The IBM of that time was a typical “big company disease” museum: the decision-making process was ridiculously long, the internal “blue blood” aristocratic culture was prevalent, and employees wore stiff white shirts and dark ties, but had long been detached from the real needs of customers. The whole world was discussing “who killed IBM,” and the consensus on Wall Street and in business schools was: this beast is beyond cure, the only way out is to break it up into several independent companies and sell them off.

It was precisely at this “darkest hour” that IBM welcomed the most critical “savior” in its history, and also the most extreme tempering of its “antifragile” ability. In 1993, Lou Gerstner,【Note: Louis V. Gerstner Jr. (born 1942), former CEO of American Express and RJR Nabisco. He was parachuted into IBM in 1993 and, without any technical background, successfully led IBM’s century-defining transformation. His autobiography Who Says Elephants Can’t Dance? is a classic business book documenting this transformation.】 a “barbarian” from the food and finance industries, was appointed at a time of crisis to become the first CEO in IBM’s history to be hired from the outside.

After Gerstner took office, everyone expected him to announce a grand “new vision” of breaking up the company. But the first thing he did took everyone by surprise. At his first press conference after taking office, he said: “There’s been a lot of speculation that I’m going to deliver a new vision for IBM… The last thing IBM needs right now is a vision.” Behind this sentence was a profound antifragile wisdom. He realized that when an organization is on the verge of chaos and collapse, any empty, unrealistic grand narrative will only exacerbate the organization’s “entropy increase.” The immediate priority was to stop the idle talk, focus on execution, and reconnect the lifeblood with customers.

The second, and most fundamental, decision he made was to flatly reject the plan to break up IBM. The consensus at the time was that IBM’s hardware, software, services, and other departments should all be independent and compete freely in the market. But after weeks of frantic research, Gerstner came to the exact opposite conclusion: IBM’s one and only irreplaceable core competency was precisely its ability of “scale” and “integration.” As customers increasingly needed one-stop, complex IT solutions, an “integrator” that could provide everything from hardware and software to consulting services had an unparalleled value. He decided not only not to break it up, but to knit IBM more tightly together.

This decision was the highest manifestation of IBM’s “antifragile” spirit. It did not choose to disintegrate and retreat in the face of shock (this is a “fragile” response), but from the shock, it saw an opportunity that others did not see. Gerstner keenly perceived that although the mainframe business was in decline, the thousands of IBM mainframes installed in large enterprises around the world were in themselves a huge “gold mine” waiting to be tapped. What these customers needed was no longer faster machines, but how to use information technology to solve business problems.

And so, Gerstner led the most magnificent “second curve” transformation in IBM’s history: from a hardware-centric company to a “service” and “solution”-centric company. He vigorously promoted the development of “IBM Global Services,” elevating the businesses of consulting, systems integration, and outsourcing services to the strategic core of the company. This was an extremely painful process. It required the entire company’s culture to shift from a “box-selling” hardware mindset to a “problem-solving” service mindset. Gerstner, with an iron fist, laid off redundant staff, reformed the compensation system, broke down internal barriers, and completely shifted the company’s center of gravity.

The result of this transformation was astonishing. During Gerstner’s nine-year tenure, IBM’s stock price increased tenfold, and the revenue from the services business grew from thirty billion dollars to nearly eighty billion dollars, becoming the company’s main source of profit. IBM not only survived, but found a business model that was broader and more resilient than selling hardware. The crisis that had almost killed it ultimately became the catalyst for its rebirth, forcing it to evolve from a “fragile” hardware manufacturer into a “robust” and even “antifragile” service giant.

To this day, IBM’s epic of evolution continues. Faced with the new waves of cloud computing and artificial intelligence, it has once again shown the courage of a brave warrior cutting off his own wrist. Under the leadership of Arvind Krishna, IBM spent $34 billion to acquire the open-source software giant Red Hat, betting its future on the “hybrid cloud.” At the same time, it resolutely spun off its traditional, still-profitable IT infrastructure services business. This is exactly the same as Watson’s gamble and Gerstner’s transformation.

Like a phoenix rising from the ashes, reborn from the fire. IBM’s century of solitude is, in its essence, the solitude of an “evolver.” It has, with more than a century of practice, repeatedly proven to us a profound truth: for an organization to achieve true longevity, it relies not on an impregnable city wall, but on the courage to tear down the city wall and rebuild a home on the ruins. True “Evolutionary Force” is this “antifragile” ability to gain new life in one “creative self-destruction” after another. It is a tragic and magnificent wisdom, the highest reward that time ultimately gives to the brave who dare to “live towards death.”

With this, we have used four fundamental forces—the Expansionary Force, the Contractionary Force, the Equilibrium Force, and the Evolutionary Force—to draw an internal “force field map” for the “organization,” one of humanity’s greatest inventions. These four forces, like the four seasons of spring, summer, autumn, and winter, cycle through the life of an organization, rising and falling, jointly composing a hidden yet magnificent internal history of game theory.

The Expansionary Force is the “spring” of an organization, the irrepressible growth impulse originating from the life instinct. It craves sunshine, rain, and soil, driving the organization to pursue markets, profits, and scale, and to explore the uncharted territories of new technologies. Huawei’s “wolf culture” and the mania of the internet bubble are the extreme forms of this force, catalyzed by human nature and capital. It is full of hope, ambition, and vitality, but it also inevitably plants the seeds for future crises.

The Contractionary Force, on the other hand, is the “autumn” and “winter” of an organization, the ruthless projection of the “Law of Increasing Entropy” from physics into the sociological domain. Any organization, no matter how efficient and orderly it was at its inception, cannot escape the communication noise, loss of focus, and process sclerosis brought by scale expansion. The body of the organization will inevitably become stiff, slow, and full of internal friction. The various symptoms of “big company disease,” the sudden collapse of the Nokia empire in the face of change—these are all manifestations of this silent, downward force, declaring its irresistible existence.

The Equilibrium Force is the “summer” of an organization, the counterforce of the light of human reason against chaos and disorder. It attempts to put a rein on the galloping “Expansionary Force” and build a dam against the inevitable “Contractionary Force” with bureaucracy, processes, and culture. It pursues order, stability, and predictability, like McDonald’s standardization manual and Toyota’s lean production line, dedicated to turning the organization into a precision, error-free machine. However, the extreme of balance also often means the loss of vitality and the strangulation of “accidents.”

And the Evolutionary Force is the mysterious force of the “fifth season,” which transcends the cycle of the four seasons. It is the seed that nurtures a new “spring” in the bitter cold of “winter.” It is a courage to live towards death, the extraordinary ability of an organization to, when it encounters the “curse of success” or a “black swan” shock, dare to self-deny, self-revolutionize, and start a “second curve.” Microsoft’s “turning the elephant” and IBM’s “century of solitude” are the brilliant lights that this force has burst forth in the harshest environments. It tells us that the ultimate height an organization can reach depends not on how fast it runs in good times, but on whether it can complete a profound “evolution” in adversity.

Friends, having come this far, you may find that the game of these four forces is also a portrayal of each of our own lives. When we are young, we are full of the “Expansionary Force” to build a career. As we grow older, we feel the “Contractionary Force” of the decline of our physical and mental energy. We use reason and self-discipline to build the “Equilibrium Force” of our lives. And at every critical crossroads of our lives, do we not also long for an “Evolutionary Force” to break through ourselves?

A history of organizations is half a theory of human nature. Only by understanding how these four forces interact in the micro-world of an enterprise can we truly obtain the key to dissecting commercial civilization.

Now, it is time to switch our vision from the “microscope” for examining enterprises to the “telescope” for examining nations. Because the “nation” is precisely the most magnificent, most complex, and most far-reaching ultimate organizational form created by humanity. Does the underlying logic that drives the rise and fall of an enterprise also apply to explaining the glory and twilight of an empire, the rise and fall of a civilization?

In the next chapter, we will officially set off, calibrating this “Four Forces Compass” to a new dimension, to explore the more magnificent “civilizational force field,” and to try to answer the ultimate questions that have lingered in the depths of history.

As the Xunzi, On Heaven says: “Heaven’s ways are constant. It does not exist for the sake of Yao, nor does it perish for the sake of Jie.” What drives history may not be the grand strategy of a certain hero, nor the wanton acts of a certain tyrant, but the cold “forces” that are hidden beneath the surface and are as constant as physical laws. And our journey has just begun.