A complex system is one with “many dynamically interacting parts” (Beinhocker 2006, p.18). If the economy is a complex, emergent order, then you – future managers – are in the driving seat.
How does an economy resemble an evolutionary model?
- A design space of possible designs
- A schema that codes those designs –> business plans
- A set of building blocks that underlie the designs –> physical and social technology
- A schema reader that turns the business plans into reality –> management teams
- An environment where evolutionary competition takes place –> the marketplace
Note that we’re not talking about firms, which are merely legal fictions. We’re talking about a business.
Beinhocker (2006 p.334) makes the argument that Microsoft’s success was built on an evolutionary approach. Rather than bet big on a particular development in the operating system market, they spread their bets across a number of different experiments. They invested in MS-DOS; did a joint venture with IBM; did a joint venture with Unix; bought a PC manufacturer that used Unix; invested in software development; and invested in Windows. Under conditions of uncertainty, instead of choosing which future is most likely to happen, it’s better to plan for an array of potential futures. This form of scenario planning can be very powerful because when you start to receive feedback on which of those futures is occurring, you can redirect resources towards an existing business plan.
In an evolutionary framework, the objective of a business is to endure and grow over time. It is not to “make a profit”, rather this is one (of several) constraints on the ability to endure and grow. These constraints include:
- Generate a competitive return for shareholders in order to attract capital
- Attract employees through appropriate incentives and compensation
- Attract suppliers through mutually advantageous agreements
- Create value for customers by producing goods and services that are demanded
- Meet all legal and regulatory obligations
So how do you ensure that you endure and grow over time? How can a business discover new ways to create value, and adequately compensate their stakeholders? Simple: adapt and execute. Try lots of things and see what works. Do more of what works and do less of what doesn’t. Combine an adaptive walk (small steps that get you to a higher plain) with random jumps (to discover new starting points).To do this effectively, we need to recognise what type of bets we’re making:
- How risky are they?
- How related are they to current activity?
- How long until they pay off?
There’s been a trend for companies to grow into vast conglomerates, diversifying their activities through different businesses in different markets. But what we’re alluding to here is more like venture capital. They are “portfolios of strategy experiments”, and their varied investments can all be assessed on the dimensions of “risk, relatedness, and time horizon” (Beinhocker 2006, p.347).
The ecological landscape is characterised by power laws, not a normal distrubution. And this generates a number of strategic insights:
- Market forces are pretty efficient
- The curve is extremely steep at the bookends
- The curve is getting steeper
- Size isn’t everything, but it isn’t nothing, either
- Industry matters, a lot
- Mobility is possible—but rare.
Finally, work to building an environment conducive to all this:
We may not be able to predict or direct economic evolution, but we can design our institutions and societies to be better or worse evolvers” (Beinhocker 2006, p.324).