Natural Laws of Business : How to Harness the Power of Evolution, Physics, and Economics to Achieve Business Success

by Koch, Richard

• ISBN13: 9780385501590
• ISBN10: 0385501595
• Format: Hardcover
• Copyright: 2001-08-14
• Publisher: Crown Business

Summary

Running a businessany businessis a risky proposition. It often seems that we are being buffeted by random variables in the economy and the marketplace that are not only beyond our control, but impossible to foresee with any true certainty. But in the groundbreakingThe Natural Laws of Business, businessman and entrepreneur Richard Koch, author ofThe 80/20 Principle, reveals a unique and remarkably accurate way in which managers and executives can use fundamental principles of science to anticipate and dramatically improve their chances of success. From Newtonian physics and Mendelian genetics to cutting-edge chaos theories, science explains how and why the worldincluding the business world works the way it does. Now, Richard Koch provides fascinating, completely accessible explanations of key scientific and economic theories, including their history and development. Through real-life examples and practical instructions he shows us how to successfully incorporate these natural laws into daily business decisions. For instance, drawing on four centuries of scientific progress, Koch explains how Darwin's theory of natural selection can become the key to enhancing a company's competitive advantage; how Einstein's theory of relativity can hold the secrets to improving time management; how the insights of evolutionary psychology can help managers improve their relationship with their employees; and how a Plague Theory formula can help predict the impact of technology or product innovation on your business. First published in the United Kingdom, where it has garnered praise from noted academics, critics, and business leaders,The Natural Laws of Businessis a groundbreaking, highly insightful examinationfor science lovers and business leaders alike--of the essential tools and techniques for analyzing and dealing successfully with the ever-changing business environment of the twenty-first century.

Author Biography

Richard Koch, author of the internationally acclaimed <b>The 80/20 Principle</b><i>,</i> is an extraordinarily successful entrepreneur whose ventures have included consulting, hotels, restaurants, personal organizers, and the distilling industry. Formerly he was a consultant with The Boston Consulting Group and a partner of Bain & Company.

Table of Contents

Preface Appreciating a Wonky World	1	(15)
PART I The Biological Laws
How Economic Information Drives Progress
The Universe Is Run by Selection	15	(24)
Evolution by Natural Selection	15	(2)
Natural Selection	17	(4)
Six Universal Principles Implied by Evolution by Natural Selection	21	(2)
Darwin and Business	23	(11)
Evolving to Avoid Failure	34	(3)
How to Use the Natural Laws	37	(2)
What Darwin Couldn't Explain	39	(19)
Mendel's Genes, Selfish Genes, and Business Genes	39	(1)
Mendel's Laws of Heredity	40	(2)
The Selfish Gene	42	(4)
The Theory of Business Genes	46	(9)
Business Genetics for Executives---Six Rules	55	(2)
How to Use the Natural Laws	57	(1)
Gause's Laws	58	(8)
Gause's Principle of Survival by Differentiation	58	(1)
Gause's Principle of Competitive Exclusion	59	(1)
Coexistence, Dominance, and Bi-stability	59	(6)
How to Use the Natural Laws	65	(1)
The Neurology of Stone Age Man	66	(24)
Evolutionary Psychology	66	(11)
The Endowment Effect	77	(5)
Transcending Genetic Dispositions	82	(4)
How to Use the Natural Laws	86	(4)
Resolving the Prisoner's Dilemma	90	(25)
Game Theory	90	(1)
The Prisoner's Dilemma	91	(10)
The Theory of Co-opetition	101	(8)
How to Use the Natural Laws	109	(1)
Part One Concluding Note	110	(5)
PART II The Physical Laws
Newtonian and Twentieth-Century Physics
Newton's Impact	115	(14)
Newton's Laws of Motion and Gravity	115	(4)
The Gravity of Competition	119	(2)
Corporate Gravity	121	(5)
Escaping Corporate Gravity	126	(1)
How to Use the Natural Laws	127	(2)
Farewell, Clockwork Universe	129	(15)
Relativity	129	(1)
Einstein's Special and General Theories of Relativity	130	(3)
Time: At the Heart of Competitive Advantage	133	(6)
Relativity in Business	139	(2)
The Medium Is the Message	141	(2)
How to Use the Natural Laws	143	(1)
The Triumph of Twentieth-Century Science	144	(11)
Quantum Mechanics	144	(1)
Niels Bohr and the Quantum Leap	144	(2)
The Principle of Complementarity	146	(5)
How to Use the Natural Laws	151	(1)
Part Two Concluding Note	151	(4)
PART III The Nonlinear Laws
Interdisciplinary Science
The Third Great Scientific Breakthrough	155	(24)
Chaos and Complexity	155	(1)
Chaos	156	(4)
Chaos, Chance, and Business	160	(2)
Chance---the Role of Luck	162	(2)
The First-Mover Advantage	164	(3)
Complexity and Emergence	167	(5)
Complexity and Business	172	(5)
How to Use the Natural Laws	177	(2)
Achieving More with Less	179	(25)
The 80/20 Principle	179	(2)
Pareto's Law	181	(4)
How to Use the 80/20 Principle in Business	185	(12)
The Power of Weak Ties	197	(2)
Control Theory	199	(3)
How to Use the Natural Laws	202	(2)
Punctuated Equilibrium, the Tipping Point, and Increasing Returns	204	(26)
Punctuated Equilibrium	204	(2)
Plague Theory	206	(2)
The Tipping Point	208	(8)
Moore's Law	216	(3)
Metcalfe's Law	219	(2)
Industry Sweet Spots	221	(2)
Changes in the ``New Economy''	223	(5)
How to Use the Natural Laws	228	(2)
The Paradox of Enrichment, Entropy, and Unintended Consequences	230	(17)
The Natural Laws of Caution	230	(4)
The Law of Entropy	234	(8)
How to Use the Natural Laws	242	(1)
Part Three Concluding Note	242	(5)
PART IV Routes to Success That Really Work
Finale The Gospel According to the Natural Laws	247	(7)
The Scientific Laws Driving Progress	247	(7)
Notes	254	(9)
Index	263

Excerpts

1

The Universe Is Run by Selection

If I could give an award for the best idea ever I would give it to Darwin, because his idea unites in a stroke these two completely disparate worlds, until then, of the meaningless mechanical physical sciences, astronomy, physics and chemistry on the one side, and the world of meaning, culture, art and biology.

daniel dennett

Evolution by Natural Selection

In the material world, nothing is more important than evolution by natural selection. Without natural selection, our species could not exist. If selection did not apply to ideas, technologies, markets, companies, teams, and products in precisely the same way as it applies to species, we would all be working on the land struggling to avoid malnutrition and famine. Selection drives all material progress.

The Origins of Darwinism

In the 1830s, both during his long trip around the world and when back in England, Darwin observed the behavior of animals that favored the survival of themselves and their offspring. For example, when in the Gal?pagos archipelago in the South Pacific in 1835, Darwin noted that a certain white bird would calmly sit by while the first of its hatchlings killed the second. Why did the bird not intervene--or, if she wanted only one hatchling, why bother to lay more than one egg? Repeated observation gave Darwin the answer: he determined that a single egg gave only a 50 percent survival rate (survival being defined as that of at least one hatchling), that two eggs raised the survival rate to 70 percent, but that three eggs brought the survival rate below 50 percent. Further, if there were two live hatchlings, the probability of one of them surviving was lower than if there was only one hatchling. Hence the mother's apparently perverse behavior was actually conducive to the survival of her family.

Darwin combined observations from his field research with two ideas that had been around for many decades in different academic disciplines, and fused them together with explosive effect. The two ideas were competition and evolution. Darwin first thought of natural selection in 1838 while reading Thomas Robert Malthus's Essay on Population, a dire prophecy of the effects of competition between individuals for food. Malthus in turn had been influenced by Adam Smith's theories of economic competition in The Wealth of Nations, the first volume of which had been published in 1776. Smith's thinking had been influenced by a writer another century or so earlier, namely the political philosopher Thomas Hobbes, who had in 1651 described society as "the war of all against all."1 This means the idea of competition was common currency among intellectuals almost two hundred years before Darwin published On the Origin of Species by Means of Natural Selection; or, the Preservation of Favoured Races in the Struggle for Life.

Evolution had also been widely discussed in the early nineteenth century. Fossils showed that species had evolved from earlier, more primitive species. K. E. von Baer (1792-1876) revealed a major key to the process when he stated that "less general characters are developed from the most general, until the most specialised appear."2 Evolutionists talked about "heterogeneity emerging from homogeneity."3 What no one before Darwin had explained satisfactorily was how evolution worked.

Natural Selection

Darwin's theory of natural selection is elegant and extremely economical, resting on three plain observations.

First, creatures systematically overproduce their young. "There is no exception to the rule," Darwin states, "that every organic being naturally increases at so high a rate, that if not destroyed, the earth would soon be covered by the progeny of a single pair." He observes that cod produce millions of eggs. If they all survived, the oceans would be solid cod within six months. Elephants are the slowest breeders of all known animals, yet within five centuries, if unchecked, "there would be alive fifteen million elephants, descended from the first pair." Survival is a numbers game, with the odds stacked against most creatures. "A struggle for existence," Darwin concludes, "inevitably follows from the high rate at which all organic beings tend to increase."

Second, all creatures vary. We are all unique.

Third, the sum of that variation is inherited. We are more like our parents than we are like other people's parents.

Darwin put these three obvious facts together to derive the rudiments of natural selection. Competition among siblings means that only a few can survive. As Darwin wrote with feeling in On the Origin:

. . . all organic beings are exposed to severe competition . . . Nothing is easier to admit in words the truth of the universal struggle for life, or more difficult--at least I have found it so--than constantly to bear this conclusion in mind. Yet unless it be thoroughly engrained in the mind, I am convinced that the whole economy of nature, with every fact on distribution, rarity, abundance, extinction, and variation, will be dimly seen or quite misunderstood.4

Which individual plants and animals will survive? Clearly, those that exploit or fit in best with what Darwin called "the conditions of life." Darwin coined the phrase "natural selection" as the "preservation of favourable variations and the rejection of injurious variations." This means plants and animals that have been naturally selected will have had the most successful parents--those who in turn had survived and came from a long line of survivors--and in turn will have more offspring than other organisms. So in each generation there is improvement, driven by the natural selection of the survivors and by the relative reproductive success in that generation of the survivors: "The slightest advantage in one being . . . over those with which it comes into competition, or better adaptation in however slight a degree to the surrounding physical conditions, will turn the balance."5

Darwin keeps hammering home his point that natural selection depends on variation. When the "conditions of life," such as climate, change, he says: ". . . this would manifestly be favourable to natural selection, by giving a better chance of profitable variations occurring; and unless profitable variations do occur, natural selection can do nothing."6

For most of Darwin's contemporaries, the really controversial aspect of On the Origin was not the original part--natural selection--but rather the support that Darwin gave to the general idea of evolution, and especially humanity's descent from animal species. But although he collected (rather inconclusive) data between 1838 and 1859, his main contribution was the flash of insight that he had in 1838: that there was competition for life between individuals and that traits were conserved through their relative adaptability to life's conditions.

The process is thus very simple: variation, then selection, then further variation. Then more variation, more selection, more variation. And so on back to the start of life and forward to eternity. This is how species evolve.

Variation Leads to "Better Adaption"

Intrinsic to improved congruence with the conditions of life, therefore, is variation. If there were no differences between parents, there would be no differences between offspring. If there were no differences, even between the offspring of the same parents, there would be no basis for differential success. And success means fitting the "conditions of life." There will thus be a continual process of improvement or better adaptation to the environment. Although, of course, the environment may change, producing different winners and losers.

Variations and improvements occur continually within species, but occasionally a mutation occurs when an individual has a new characteristic. This mutation may improve or worsen the odds of survival. If the latter, the mutation will die out. If the former, the individual mutant will prosper and leave plenty of offspring, who will inherit and pass on the advantage.

Over time, therefore, most species will evolve positively. And they will respond to any change that the environment brings. When conditions change, new characteristics are required--and encouraged.

Diversity Leads to Efficient Use of Resources

Darwin suggested that the more species there were on a piece of land, the more efficiently the land would be used. A number of recent experiments have confirmed his hypothesis. Research reported in 1984 on 147 plots of Minnesota prairie, for example, demonstrated that the greater the number of species in a plot, the more biomass the plot produced and also the more nitrogen the soil produced; with fewer species, nitrogen leached out of the soil and was wasted.7

What does this prove? That if a species is diverse, it can survive and prosper; if a species is homogeneous, it is vulnerable.

In the Pacific Northwest of the United States, where wild salmon were disappearing, scientists bred huge numbers of hatchery salmon and dumped them into the rivers. But these hatchery salmon had little diversity. They were vulnerable to a slight change in the ecosystem. Too many riverside trees had been cut down for logs. Result: less shade and therefore a slight rise in river temperatures. Further result: an increase in certain diseases that couldn't flourish in colder water. Final result: the hatchery salmon nearly all died from disease. On reflection, the scientists realized that lack of diversity was the root problem--had the salmon been gradually interbred, allowing mixing and mutation, a diverse adult population would have contained some salmon resistant to the new diseases.

The same applies to computers. More than nine out of ten computers today have the Windows operating system. These computers have the same core internal components. And every computer with Microsoft software is vulnerable to the same computer viruses. Early in 2000, a hacker took advantage of this vulnerability by releasing a virus disguised in the message "I love you," which infected computers worldwide and disrupted thousands of e-mail systems from private homes to the Pentagon. The "Love Bug" virus drew strength from the homogeneity of software.

It's not fanciful to see the same process at work in cities. In the 1950s and 1960s, town councils and private developers alike, both in America and Europe, built massive tower blocks, all the same shape and pattern--oblong, high, undifferentiated. Like Malvina Reynold's "Little Boxes," "they're all made out of ticky-tacky and they all look just the same." Result: misery, alienation, crime. In her fascinating book, The Death and Life of Great American Cities, Jane Jacobs shows that when street lengths, building shapes, sizes, ages, and areas within cities are more diverse, then the cities are not only more beautiful, but also more energetic and wealthier.

Diversity, therefore, always leads to even greater diversity, and to sustainable growth. If we want to sum up the theory of evolution by natural selection in two words, which have great relevance for all societies and businesses, we should simply remember: diversity works.

Does Evolution Imply Progress?

According to Darwin, competition and blind chance drive improvement.

The inhabitants of each successive period in the world's history have beaten their predecessors in the race for life, and are, in so far, higher in the scale of nature; and this may account for that vague and yet ill-defined sentiment, felt by many palaeontologists, that organisation on the whole has progressed . . . old forms having been supplanted by new and improved forms of life, produced by the laws of variation acting round us, and preserved by Natural Selection.8

Modern biologists are usually extremely careful to stress that there is no implicit evolutionary process leading naturally to improvement; evolution, to scientists, does not imply any imminent purpose or historical progress. Organisms adapt themselves to the conditions of life, but the fact that "better adapted" organisms thrive at the expense of the "less adapted" implies no value judgment: better means more likely to survive and multiply, not superior.

Six Universal Principles Implied by Evolution by Natural Selection

Jane Jacobs9 identifies three themes that were common to all the "evolutionists" of the nineteenth century:

* Differentiation emerges from generality. One original species leads to all others. New species are formed from an existing species. This is a universal principle: in knowledge, one branch gives rise to one or more new branches through specialization; in the economy, the same thing happens when one industry gives rise to more specialized branches thereof, or when one firm spawns spin-offs, each of which develops its own particular variations. Variation is the key to development.

* Differentiations become generalities from which further differentiations emerge. In other words, variation never stops and inevitably gives birth to increasing complexity and diversity.

* Development depends on codevelopment. "All forms of life," said Darwin, acutely aware of nature's web of interdependent species, "make together one grand system." Jane Jacobs's The Nature of Economies provides a perfect illustration of this:

A horse requires more than its ancestors. A horse implies grass. Grass implies topsoil. Topsoil implies breakup of rocks, development of lichens, worms, beetles, compost-making bacteria, animal droppings--no end of other evolution and lineages besides that of the horse.10

Does this theory apply only to organic species? Absolutely not. Today's global economy, as we'll explore later in greater detail, demonstrates the same pattern of codevelopment and intricate interdependence.

In addition to these three evolutionary themes, Darwin's theory of natural selection contains another three crucial twists:

* The odds against survival are high, leading to a struggle for life. In nature, in ideas, and in economies, so much is produced that only a small fraction can survive. Failure is the normal condition. This implies that only organisms producing many offspring and generating a stream of new variants can hope to beat the odds.

* The conditions of life determine whether species and individuals survive or not. In contrast to the French naturalist Jean Lamarck (1744-1829), who claimed that species adapted to the demands of the environment, Darwin held that the environment was the determining factor. In Lamarck's opinion, species evolve to survive; Darwin argued that species naturally evolve, and the environment decides whether or not they survive.

This may sound a subtle distinction, but it is crucial. Darwin implies that species, and to an even greater degree individuals, cannot hope to control their own destiny. This is a key insight that can be applied to business, and in life. If a business or a career is failing, there are only two remedies: change the environment or change the character of the business or the individual.

In evolution by natural selection, the environment is more powerful than the species, and the species is more important than the individual. In economic development, the market is more important than any particular industry, and the "species" of producers or consumers is more important than any individual firm or consumer. It follows that if any business enterprise or individual is not succeeding, a radical change of environment or behavior is necessary.

* The process of natural selection contains high degrees of luck, randomness, and arbitrary development. Natural selection is a process of experimentation in which luck is paramount. So is business.

Darwin and Business

According to Bruce Henderson, the founder of the Boston Consulting Group, "Darwin is a better guide to competition than economists."11 This is an important observation, although perhaps hardly surprising: Darwin's idea of natural selection was, as we have said, in part analogous to the theories of competition of Thomas Malthus and Adam Smith. So, in applying the lessons of natural selection to business, we are in a sense coming home to a common intellectual heritage.

1 Thomas Hobbes (1651; 1973) Leviathan, J. M. Dent and Sons, London.

2 Quoted in Jane Jacobs (2000) The Nature of Economies, The Modern Library, New York.

3 See Stephen Jay Gould (1977) Ontogeny and Phylogeny, Belknap/Harvard, Cambridge, MA.

4 Charles Darwin (1859) On the Origin of Species by Means of Natural Selection, John Murray, London, Chapter III. My quotations are from the 1985 edition from Penguin, London, edited by J. W. Burrow: see pp. 115ff.

5 Ibid.

6 Ibid.

7 See Adrian Forsyth and Ken Miyata (1984) Tropical Nature, Macmillan, New York.

8 Charles Darwin, op. cit., Chapter X, p. 342.

9 See Jane Jacobs (2000) The Nature of Economies, Random House, New York. This is an excellent short study expressed in didactic dialogue, and I have drawn on many of its themes.

10 Jane Jacobs (2000) The Nature of Economies, The Modern Library, New York.

11 Carl W. Stern and George Stalk, Jr. (1998) Perspectives on Strategy from the Boston Consulting Group, John Wiley & Sons, New York.

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Excerpted from The Natural Laws of Business: Applying the Theories of Darwin, Einstein and Newton to Achieve Business Success by Richard Koch
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.