Economics: The mixing of biology and business
On the last Friday of each month at Coffee Muggers, entrepreneurs, business owners, and folks with ideas meet to talk about growing their businesses. It is a light, casual, open conversation, but there’s also some evident concern, even anxiety, about the future and whether their ideas will work.
It’s not easy to predict how a business will grow in a changing market. Anyone who’s fought through creating forecasted financial statements or next year’s budget knows this. Business projections are a guess. They can’t accurately predict the future, because the world is complex and unpredictable.
There’s a new twist on economic theory called “complexity economics” that embraces this uncertain reality and uses biology to understand our economy. The business world has historically thought of business functions as mechanical: Apply force and something will happen. Run a daily radio ad and grow the customer base. Drop your prices by 10 percent and sales will increase. We see every day that this doesn’t usually work as we had expected. Growing a business is not as simple as pulling a lever. The economy is a complex adaptive system, and it is not as simple as Adam Smith’s theory that the “invisible hand” allocates resources through the balancing forces of supply and demand. Can you explain Google or Facebook using conventional linear supply and demand curves? The traditional model works only in an “ideal world.” Try to find one.
Instead, let’s try to look at companies as species that evolve. Field mice, for one example, are constantly adapting to the environment by getting lighter or darker coats, longer or shorter tails, bigger or smaller ears, and so on. Nature is constantly adapting by making many small bets and then — when something works well — doubling up on the adaptation that works. If darker mice are avoiding more coyotes, nature quickly doubles up on that adaptation, and mice evolve with darker coats. If large ears are also succeeding, nature will cross-breed these two adaptations, and mice evolve with darker coats and larger ears.
Now let’s apply this to business. Your company operates in a complex world, so it must always be testing its adaptations, new products, and innovative services to see what works. We cannot always rely on the mechanical expectation that the market demands lower prices. Instead, try small bets: Seek new ideas for existing customers, sample a different form of delivery, or launch a trial in a new market. Get out there and test the waters — constantly. When something works, double up on it. Go in that direction. If you have two new twists on a product line that work, cross-breed them. As an example, look at the evolution of the LOKI product line (a outwear company in Grand Junction). They started with a hat that converts to a face shield and neck gator. Then they tried jackets with built in mitts. Ahh, that’s nice. So, yes, focus on the cold … yes, hats and more jackets. How about shoes? Yes, well, sort of. Actually, how about a line of kids’ jackets? Yes, and gloves as well. How about more women’s specific jackets? Who knows? Try it. In LOKI’s case, they design samples to add to the line and see what takes. This approach means that the company stays fresh and new, and they know exactly what the customer wants.
Does that sound easy? Well, I’m afraid it’s not. Complexity economics means that entrepreneurs, companies, product managers, and salespeople must fail more than they succeed. This means putting your ideas out there knowing full well that most of them will fail. It means having to give up on the genius business plan with the singular brilliant paradigm-shifting, world-altering idea that makes us all rich. It won’t be easy, but we must get comfortable with failure. We must learn to fail fast and frequently.
Of course we won’t throw the business plan and budget out the window. We still need to communicate expectations, set goals, and research the market. But we can think biologically. Lions, tigers, and bears survive by constantly watching the competition and adapting to their environment. In the business world we expect the mechanical; we expect a response that works on paper. But in the real world, customers are drawn to the unexpected: to new ideas, to an advantage over competition. Business leaders must focus on creating new stuff that meets a need in the economic environment. It isn’t easy, but it is better — because this is how the world really works. And by embracing this theory, we’ll be better able to adapt to the changes that the world, the economy, and our customers throw at us.
For more information on complexity economics, I recommend Eric D. Beinhocker’s, The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics. Boston: Harvard Business School Press, 2006.