Second Order Consquences

June 29, 1956, President Dwight Eisenhower signed the Federal Aid Highway Act of 1956, leading to the creation of the Interstate Highway System. Finished 35 years later, one-quarter of all vehicle miles driven in the United States use the Interstate system. As would be expected, the most direct effect of the Interstate was on other players in the transportation industry – rail in particular. Passenger rail traffic fell by more than half in the years that followed and trucking went on to be the dominant form of freight, growing 40X to become 4 times the size of rail.

The impact of the Interstate Highway System reverberated far beyond just the transportation industry. Highways helped build the suburbs, in turn leading to the rise of the shopping mall and retailers like Walmart. Fast food was born to feed a nation of drivers, with drive-thrus offering a quick in-and-out off Interstate exits. And sadly, many small towns withered away when the Interstate passed them by.

These are called Second Order Consequences – the things that happen as a result of an initial cause and effect taking place. In business and in life, it is easy to foresee the first order effect. But it is much more difficult to think about the cascading consequences – both good and bad – that might come about as a result of that first change. Or as Carl Sagan more eloquently said about this very situation: “It was easy to predict mass car ownership, but hard to predict Walmart.”

The dilemma is that predicting Walmart – or what I call “Predicting The Turn” - is exactly the challenge facing today’s business leaders. With the pace of change, innovation, and disruption increasing by the minute, companies clearly need to be worried about their core industry. The additional challenge is that they also have to study change in adjacent industries and map out just how that change might have an impact on their own business. Consider the case of Coca-Cola. The headwinds they face in their core business of “sugary drinks” is obvious. When James Quincey took over as CEO in mid-2017, he realized that the second order consequences were just as challenging as the shift to healthy beverages. He witnessed this first-hand in his work in China where glass bottles had been traditionally very popular in noodle shops. But as consumers shifted to food delivery startups, glass bottles actually became a liability and sales started to decline. In the US, the second order consequence was driven by the increase of eCommerce and the decline of physical retailers. When less shoppers visit the local mall, that means less shoppers making an impulse purchase at a Coca-Cola vending machine.

As Quincey put it, “Digital is changing the way you behave, it affects other categories that are not the primary reason you thought about making the shopping trip. Unless you’re adapting to the secondary effect, you can find -- all of a sudden -- weird and surprising changes happening to you.”

This is a great testament to what leadership really means in today’s ever evolving business landscape. The companies of tomorrow will be those that started planning today not just for the direct change in their industry, but the second (and third) order consequences from adjacent ones as well.

Case in point if we go back to automobiles, Benedict Evans of Andreesen Horowitz called out that “there are two foundational technology changes rolling through the car industry at the moment; electric and autonomy.” Once again, it is pretty easy to see that both of these – particularly electric – will impact the gas station industry. But with gas sold at low margins, the real money in this industry comes from the attached convenience stores through snacks, sodas, beer, and tobacco. The leaders of Coca-Cola, Frito-Lay, and AB-Inbev need to recognize the cascading change of what electric cars will do to their industry partner the Convenience Store and start exploring new channels for convenience and impulse. One suggestion is GoPuff (www.gopuff.com), a company that started on college campuses and now lives by the tagline “Goodbye Convenience Store, Hello GoPuff.”

For a business to truly embrace the concept of second order consequences, it requires having a foot in today and tomorrow. It requires leaders to ask the questions of “what if and what then?” If this change takes place, what are the potential ramifications to consumer behavior that could have a cascading impact on our business or industry? It is only with that foresight that you can predict the turn and understand how and when the future of your industry will happen.

This article was originally published in AdWeek on May 14, 2018.