Embracing Transformation: Navigating First-Order and Second-Order Change in the Era of AI and Digital Disruption
Psynet Group is often brought into a company to help change it so that it can improve performance or address new opportunities and challenges. What becomes crucial in our work together is to understand if the need is to improve the mechanism to express the company’s current identity (first order change) or to align the mechanism with a change in identity (second order change).
1st Order Change
First order change works within an existing structure and organizational view of the world. You could view it as tinkering with a system – doing more or less of the same, making an existing process better or more accurate, and making incremental changes. With first order change, the mechanism is changed to produce different results; however the organization’s personality, values, and purpose remain the same. (see chart below)
2nd Order Change
Second order change is often described as transformational, revolutionary, disruptive, or chaotic. It involves seeing the world in a different way, challenging assumptions, and working from a new and different worldview. Margaret Mead believed that people only made this kind of change when they had a religious conversion, went to therapy or experienced a catastrophic event that made the old way of looking at the world irrelevant. We believe that organizations also must experience a seminal event before they enter a second order change.
When in the middle of a seminal event, as recently imposed by the Covid-19 pandemic, or maybe even now with Artificial Intelligence, organizations are faced with drastic changes; several completely outside of their control. When a second order change comes from events with high impact yet completely out of our control, it creates a fear that can either paralyze a system or provoke a significant shift in identity.
Why the Pandemic was a Seminal Event and Why AI might be the Next.
The Pandemic
The COVID-19 pandemic emerged as a seminal event for businesses globally, fundamentally altering the commercial landscape in numerous and lasting ways. Firstly, it drastically accelerated the shift towards digital transformation, as companies across various sectors were compelled to adopt digital technologies to continue operations amidst lockdowns and social distancing measures. This shift wasn’t limited to just embracing e-commerce or remote working tools; it also encompassed a broader digital integration into everyday business processes, customer interactions, and employee management.
Another profound impact was the disruption of global supply chains, highlighting the vulnerabilities in existing systems and prompting businesses to seek more resilient and flexible supply chain solutions. The pandemic also triggered a significant shift in consumer behavior and preferences, with a heightened demand for online shopping, health and wellness products, and changes in entertainment and travel habits. These shifts forced businesses to quickly adapt and innovate, leading to new product offerings and services. Furthermore, the pandemic brought to the fore the importance of health and safety protocols in business operations, altering how workplaces and customer interactions were managed.
Artificial Intelligence
Similarly, the integration of Artificial Intelligence (AI) into business operations is poised to be another seminal event, with its potential to instigate second-order changes across various industries. AI’s impact is multi-faceted, ranging from enhancing efficiency through automation to reshaping the nature of work. It allows businesses to leverage big data to an unprecedented extent, enabling more informed decision-making and innovative strategy development. AI technologies have also revolutionized customer experiences, offering personalized services and improving customer engagement through tools like recommendation engines and chatbots.
Furthermore, AI is driving innovation in product and service offerings, creating new market opportunities and altering competitive dynamics. This technological advancement brings with it significant ethical, legal, and regulatory implications, particularly concerning data privacy and algorithmic bias, necessitating new frameworks and policies. The workforce transformation, a direct consequence of AI integration, is reshaping job roles and employment structures, emphasizing the need for new skill sets. Lastly, AI’s global impact is undeniable, influencing international trade, global supply chains, and cross-border data flows, thereby shaping the future of global business operations in profound ways.
When and Why Would an Organization Make a Second Order Change?
With few exceptions, most organizational change is a response to either a crisis or an opportunity. The organization then decides whether or not to implement a first or second order change. A first order change is easier and requires adapting to the circumstances. For example, rearranging our office space to increase distance between workers is a first order change. In this case, the seminal event is more of a nuisance.
Second order change happens when the seminal event causes an organization to question its identity. They experience a feeling that their values and purpose no longer make sense in the context of the event. As a result, the change in identity means the mechanism is no longer aligned. We found misalignment to be more profound during the pandemic than during previous events. Many clients were experiencing second order changes that appeared like an organizational identity crisis. They are experienced a shift in their organization core and were telling us that what was important before is not relevant now. Therefore, many of our clients had to rethink their values, personalities and purpose. We are sensing for some companies that this maybe happening again with AI.
We use the following chart to provide an overview of our restructuring process with our clients. It shows that identity informs the behaviors and structure of the organization. When they are aligned and optimized, organizations achieve the best possible results.
The Psynet Group Approach to Alignment
However, the chart also shows that if the identity of the organization changes but their mechanism that expresses that identity does not, the lack of alignment could be disastrous on their outcomes. In some cases the outcomes are not optimized; in others they get optimized results that no longer matter to their identity.
What To Do When Your Organization Experiences Second Order Change of Identity
We believe that failing to understand the impact of seminal events on identity is a primary reason why restructuring and change initiatives fail. The solutions are complex, but these suggestions are a start:
- Understand that the identity your company experienced prior to the seminal event may have changed.
- Acknowledge that internal members and customers/consumers/clients may not be ready for your post-event identity and will also need time to adjust.
- Consider resolving or replacing elements of your organization that are not aligned with the new identity.
- Review the process you use to make decisions and make sure your leadership and decision makers apply the value hierarchy associated with the new identity.
The Point
We don’t know what the world will be like once this seminal event is over, but we do know that major events have an impact on our identity and many organizations experience the forces that push for a second order change whether it is desired or not. Psynet Group is prepared to help companies understand the impact of any event on their core identity and how to align the mechanism to actualize it. If you need a partner to reflect on the impact of a crisis or event on your organizational core identity, contact us.