The Economy as a Living System
Earth teems with life. The collective DNA of the planet weighs 50 billion tons and contains 50 trillion trillion trillion base pairs. It would fill a billion shipping containers. Life has evolved over eons as organisms found a foothold and adapted to changing conditions. It is estimated there are around 8.7 million living species.
Every life form makes a living in its own way, occupying a niche where it is specially adapted to flourish. Species specialize to reduce competition for scarce resources. This has given rise to infinite diversity.
Ecosystems are a tapestry woven from many threads. Relationships take many forms. One species may prey on another. Both may benefit from a relationship. One may benefit while the other is harmed.
We see similar patterns in the economy. Companies specialize to succeed in a particular economic niche. Like living species, each has its own unique identity, coded in its organizational DNA. New companies appear to take advantage of emerging opportunities, just as new species appear in nature. And, like ecosystems, every economy has its own unique web.
Cesar Hidalgo, an associate professor at MIT, visualized economic diversity as a ‘product space’ – a graph illustrating the relationships between products. Products are linked in the graph if they require similar enabling conditions, like institutions, capital, infrastructure, and technology. When an economy is capable of producing one product it has the means to create another that is closely related.
[Variations in the productive structure in different regions of the world. Source: C.A. Hidalgo, B. Klinger, A.-L. Barabási, R. Hausmann, “The Product Space Conditions the Development of Nations,” Science 317 (2007)]
Economic systems are creations of human ingenuity. In his book Why Information Grows: The Evolution of Order, from Atoms to Economies, Cesar Hidalgo compares apples to Apples.
“Consider two types of apples: those that grow on trees and you buy at the supermarket, and those that are designed in Silicon Valley… The main difference between them is not their number of parts or their ability to perform functions – edible apples are the result of tens of thousands of genes that perform sophisticated biochemical functions. The main difference between apples and Apples is that the apples we eat existed first in the world and then in our heads, while the Apples we use to check our email existed first in someone’s head and then in the world.”
The Silicon Valley Apple, Hidalgo says, is a “crystal of imagination” – the physical embodiment of an idea. Products use knowledge, know-how, and networks of people to translate dreams into reality. That is the role of the human enterprise. The planet is alive with human ingenuity. Earth teems with the things we create from our imagination.
A Competitive Arms Race
Biological species adopt an ecological strategy based on their role in an ecosystem. They evolve to sustain a competitive advantage and succeed in their ecological niche. Companies do the same, innovating to stay competitive. When new possibilities emerge, new forms of enterprise quickly appear to capture the opportunity.
As in living species, the ability to adapt is critical. Faced with a rapidly changing environment and cutthroat competition, companies must innovate relentlessly just to keep up. Ecologists call this the ‘Red Queen Effect,’ based on a quote from Lewis Carroll’s Through the Looking Glass. “Here, you see,” the Red Queen says to Alice, who has been running constantly but getting nowhere, “it takes all the running you can do, to keep in the same place.”
[The Red Queen lecturing Alice. Source: Illustration by John Tenniel for Lewis Carroll’s Through the Looking Glass.]
Companies differentiate themselves through their business models – the unique code that determines how they create value and how they develop relationships with others. Alexander Osterwalder and Yves Pigneur identified eight key factors in value creation in their book Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers:
- Customers – the classes of customers whose needs are served by the company
- Channels – the way the company connects with customers
- Relationships – the nature of the customer relationship and experience
- Revenue – how and what customers pay
- Resources – required physical, intellectual, human and financial assets
- Activities – activities required for the company to function effectively
- Partnerships – the supporting network of suppliers and partners
- Costs – costs incurred when the company operates in the chosen way
Creative companies look for value propositions competitors haven’t yet identified. There are many possible options and many ways to combine the choices. Only a few of the combinations are likely to be viable. The challenge is to find a compelling business model that works.
The Imperative for Change
In the face of aggressive competition companies have to abandon the status quo and pursue radical new ideas. To find an original value proposition, they also need to avoid the temptation to copy others. The economy may be crowded, but there are always open spaces that reward pioneers.
“Adaptation in the face of dislocation can help a company ride out the storm,” consultant Mark Johnson says in his book Seizing the White Space, “but business model innovation can bring about renewal by creating a new business platform uniquely suited to the radically altered terrain.” For major corporations, the stakes are high. “Business model innovation efforts,” he says, “should be focused on the pursuit of something grand – changing the game in an existing market, creating a whole new market, transforming an entire industry.”
Few companies succeed. Johnson cites the results of a 2008 IBM survey where almost all of the eleven hundred CEOs who participated said their company needed to change its business model, but only around 10 percent were actually investing in making the required change. This may explain why large companies have a growing mortality rate and a drastically shortened life expectancy.
Like life itself, companies constantly need to transform.
This article is an excerpt from a book in progress on collaboration and transformative change. It was first posted on November 21, 2017, on LinkedIn.