Doing business in booms and busts: It’s time for exploration
The Grand Valley sits in the center of a region full of extremely valuable natural resources. Although exploration and production activity has slowed for now, these resources will be in demand again once commodity prices exceed the costs to extract the goods. These demand cycles have shaped our economy for more than 50 years. So, how do we operate businesses successfully in an economy that swings up and down with global commodity markets?
If you look at the ways in which businesses interact with customers and competitors as a complex adaptive system, you can see how economies behave like complex systems in nature: ant colonies or earthquakes. Biological systems display something known as “punctuated equilibrium,” a term used to describe a pattern of alternating calm and storm.
In ordinary language, punctuated equilibrium means that things bubble along just fine for a while, building up steam but not making much progress. Then, an innovation or random change suddenly causes the whole network to erupt into rapid change. In evolutionary history, punctuated equilibrium shows up regularly. Some species dominate for long periods of time, then disappear suddenly.
A new regime jockeys for space until a new equilibrium is established.
Our local economy follows this pattern of punctuated equilibrium. We tick along, progressing steadily, and then some change occurs that throws the economy into swings. We saw this with the uranium boom in the 1950s, the oil shale boom in the 1980s and most recently with natural gas. In the late 1970s, a combination of high oil prices and advances in oil shale technology triggered a period of rapid economic volatility. From 1988 to 2004, this community saw pretty steady growth. Things bubbled along peacefully. Then in 2006, a combination of advances in hydraulic fracturing technology and high natural gas prices triggered another boom and bust cycle. The pattern is familiar.
As our economy begins to settle out again, I look around and think about when this will reoccur. I’m not sure of when, but I feel confident it will happen again.
How do we adapt to these cycles? Can you stand one more new concept? The idea of “explorations on a fitness landscape” (from “The Origins of Wealth; Evolution, Complexity and the Radical Remaking of Economics” by Eric D. Beinhicker) tells us that biological entities constantly explore for good designs that work in a given environment.
For example, the four nucleotides in DNA can be arranged into an unimaginable huge number of permutations of base pairs, yet somehow nature arrived at the 6 billion DNA base pairs in the human genome. Clearly we are a good design for the current environment.
Tweak that design a little bit and you get either a leg up in evolution or a short-lived mutant. How does nature know how to adapt? It’s done through a combination of steady adaptation and random jumps. Sometimes species evolve to be a little bigger or a little faster. Sometimes they evolve into an entirely new species.
In the business world, we see this as companies develop and evolve their product offerings. Businesses can grow by improving on what’s already out there, referred to as an exploitation model in economics or the adaption model from evolution. This is what Toyota did for the automotive market — not a totally different product, just a better one.
Other times, companies choose exploration to develop disruptive innovations that take a random jump in the market: airplanes, lasers and mobile telephones. In complex adaptive systems, the ratio between exploring for better designs and exploiting existing designs depends upon the stability or volatility of the environment. Stable environments are best suited for exploitation. Volatile environments are advantageous for exploration. It’s the ability to do both exploitation and exploration that makes an economy strong in the long run.
For those Grand Valley businesses seeking stability in our economy, there’s another way to look at this. Using complexity principles, we’re in a time of volatility. Consequently, it’s a time to focus on rapid innovation to find good designs for the coming equilibrium. For those with a business model, product or service that has been successful for most of the past decade, times have changed. Making products or services just a little bit better might not be enough. It’s time for new ideas, for random jumps, for exploration.