Business & Biology

The Noncompetitive Advantage

hunter_hunted

Have you ever been chased by a bear? Heart racing, adrenaline pumping, looking for the nearest tree to climb to avoid almost certain death? Yeah, me neither. And that fact—that lack of being chased or having natural predators or competition—is precisely why humans have such long lifespans, and why some companies dramatically outlive their peers.

For years, biologist have made the simple observations that “bigger animals live longer lives.” The idea is that the bigger an animal becomes the more efficient they become. It’s a fact of biology, which extends into the world of business, urban planning, and organizational ecology. As theoretical physicist, Geoffrey West, puts it, “This might also explain the drive for corporations to merge. Small may be beautiful but it is more efficient to be big.” As with all rules, however, there are exceptions. But before we discuss the anomalies, let’s examine our options for survival.

There are three main strategies for small animals, organizations, businesses, cities, or powerless individuals to survive in the world of Big: (1.) direct competition, (2.) indirect competition, and (3.) noncompetition.

Direct competition is the easiest to understand, but is also the least effective (lowest survival). This is like turning toward that grizzly we talked about earlier and fighting back. There’s a chance of survival, but it’s not great. And at what cost? In business, small companies that use this strategy are labeled sustaining entrants. They compete in an established market against powerful incumbents by making some improvement to mainstream products.

As Clayton Christensen noted when developing the theory of disruptive innovation back in 1995, in the case of “the disk drive industry, only 6% of sustaining entrants managed to succeed.” And this makes sense, right? To directly compete for high-end or mainstream customers in an established market is going to draw attention from much more established players who have the ability to either defend (kill us) or acquire (eat us). Either way, survival and longevity are limited.

Indirect competition is a different game. We can view this as the dog eating food scraps that have fallen from the dinner table. While direct competition between small, young entrants and large, established incumbents is inherently unfair, indirect competition serves customers that are of little interest to large incumbents. Young firms appeal to low-value customers by providing lower quality products outside the mainstream market. This type of business calls less attention to itself, because it serves customers that would be a “waste of time” to larger incumbents.

Noncompetition is the anomaly in our discussion. This strategy is exactly what it sounds like—not competing. It’s finding or creating a niche that insulates us from hazards and outside competition. In business, as you might have guessed, noncompetition is rare.

In biology, it’s extremely rare for small animals to live for long periods, but birds and bats seem to break all the rules when it comes to life expectancy. Despite being small and having rapid metabolic rates—both significant indicators of short lifespan—birds and bats live 3-3.5x longer than animals of a similar size. In a world where corporate life expectancy is decreasing, many in business would be happy with a three-fold increase in survival.

For birds and bats, it’s a matter of flying. They’ve taken themselves out of the terrestrial equation, out of reach of countless potential predators and hazards. They’ve developed a mechanism to explore the sky, a niche above us land-based creatures. Their competitive advantage is simply not competing. They just fly away.

When we look at businesses that have defied the odds of survival, our view turns east toward Japan, where a handful of companies are over 1,000 years old. Just as flying has insulated birds and bats from harm below, older Japanese companies benefit from insulation. They are often small, primarily serve Japanese markets, run on values beyond profit-at-all-costs, and operate in a culture where acquisitions and mergers are avoided (compared to the West’s seeming love of M&As). Thousand-year-old Japanese enterprises are much different than the S&P 500, like the difference between earth and sky or mammals and birds.

Google, Amazon, Apple—These are the big game animals, the predators, the bears chasing us up a tree. Perhaps we (and our businesses) can thrive for decades without becoming or competing with giants. Humans transcended the law of the jungle; birds and bats transcended the limitations of land. In order to be exceptional, we must strive to be an exception, no matter how small. Rather than competing head-on in an unfair fight, why not learn to fly?

Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. “Disruptive Innovation.” Harvard Business Review 93.12 (2015): 44-53. (Source)

Daepp, Madeleine I.G., et al. “The Mortality of Companies.” Journal of The Royal Society Interface 12.106 (2015): 20150120. (Source)

Munshi-South, Jason, and Gerald S. Wilkinson. “Bats and Birds: Exceptional Longevity Despite High Metabolic Rates.” Ageing Research Reviews 9.1 (2010): 12-19. (Source)

West, Geoffrey B., and James H. Brown. “Life’s Universal Scaling Laws.” Physics Today 57.9 (2004): 36-42. (Source)

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Business & Biology

Between Growth & Maintenance

time_to_drankImagine a city with an infrastructure problem (I know, it’s hard to imagine). The problem is this: Roads are breaking down faster than they can be repaired. As the city’s population grows, road workers cannot work fast enough to compensate for the additional traffic. Each road closure for repairs means more traffic on alternative routes and, therefore, even faster decline. Eventually, the few alternative routes that are open no longer connect to one another; construction crews can no longer get to the roads that need to be repaired; and ultimately, the system shuts down. Death by growth.

This is the basic idea behind the classic S-curve of growth (below), which is said to be so ubiquitous. From cities to cellular biology to Fortune 500 companies, most systems follow a similar pattern. They must balance between growth and maintenance.

Understanding which phase we’re in—whether high-growth, high-maintenance, or transition—can be advantageous. It can help extend the life cycle of our products, businesses, bodies, personal lives, and relationships. But when we refuse to acknowledge this shift, that’s when problems arise.

In business, this refusal is called the denial phase. As one Harvard Business Review article puts it, “[R]etailers often go through a long, painful period of denial before they acknowledge that growth has ended and it’s time to switch strategies. […] Consequently, they keep expanding until their chains begin to collapse under their own weight.” The article is referring to a study of 37 U.S. retailers—all with over $1 billion in revenue, all with top-line growth rates slowed to single digits. But while several of these historic giants were collapsing “under their own weight,” many had found a solution to the stagnation.

Companies like Macy’s, Home Depot, and McDonald’s have extended their lifespans by focusing on the maintenance phase. They thrive by creating efficiencies in their existing stores rather than opening new ones. In other words, they transitioned from a strategy for rapid growth to one of maintaining their large size.

This is not to say that growth is negative. Pure growth and pure maintenance are not what creates life. It is the in-between where we exist. As the Harvard Business Review authors explain, “this is a low-growth, not a no-growth, strategy.” Where the successful companies grew was in bottom-line revenue rather than top—shifting their focus, in order to achieve life-bringing growth.

But when growth goes unchecked, it can be devastating. We call it cancer in the body. And before we can prescribe treatment, we must have a diagnosis. Whether we label it a midlife crisis, a corporate denial phase, or an infrastructure problem, we must acknowledge mismatched reality, in order to move forward. Otherwise, misalignment can accelerate decline.

With our imaginary city, it’s a balance between population growth and infrastructure maintenance; with our bodies, it’s a balance between biologic insults and cellular repair; in life, we shift from a growth-heavy childhood to a maintenance-heavy adulthood, including more doctors visits, taxes, and responsibility. It’s this transition from growth to maintenance that creates the S-shape of life, and it’s a delicate balance—easily misunderstood and mismanaged.

It may seem simplistic to minimize the life cycle of so many different topics into only two sides of the same coin. In fact, it is simplistic. While simple sometimes means limited understanding, it also can serve as a practical model for an exceedingly complex world. So take a moment and think: Am I spending too much time in growth phase? What about maintenance? Is this a transition? Where are we?

growth-maintenance graph

Fisher, Marshall, Vishal Gaur, and Herb Kleinberger. “Curing the Addiction to Growth.” Harvard Business Review 95.1 (2017): 66-74. (Source)

Evans, David S. “Tests of Alternative Theories of Firm Growth.” Journal of Political Economy 95.4 (1987): 657-674. (Source)

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Business & Biology

Cavemen and Computers: A Success Story

fireThe reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.

—George Bernard Shaw, Man and Superman (1903)

Indeed, if the same mistake is repeated over and over again, what is the point of being persistent?

—Fang Wu & Bernardo Huberman, “Persistence and Success in the Attention Economy” (2009)

If nothing else, humans are two things: (1.) We are tool builders, constantly adapting to new environments by creating new dwellings, clothing, modes of transportation, and societies. And (2.) we are runners (yes, runners). It is our defining ability to run that is perhaps the most fundamental aspect of success. Rather than learning from contemporary masters or fighting through trial and error, perhaps the lessons of success can be best learned from the rise of the most successful species on earth—ourselves.

Excluding the use of man-made vehicles, Homo sapiens are still the fastest animals on earth (over long distances… on land… if it’s hot enough outside). Yes, we are natural born runners, and this extremely specialized skill is the reason we stand on two legs, are relatively hairless, perspire rather than pant, and why our butts look so darn good. But before our brains grew large and humans reigned supreme, our early hominid ancestors used their unique physiology to their advantage over their knuckle walking cousins.

Persistence hunting—chasing prey until sheer exhaustion—is thought to be the primary reason for our running abilities. Our prehistoric relatives (and even some indigenous peoples of modern day) weren’t faster or stronger than other creatures, but they would chase much quicker animals, such as wildebeest, zebra, and deer, for one or two days until the animals simply collapsed from exhaustion. It is even proposed that the rich protein diet afforded by persistence hunting is what allowed for developing larger brains in humans. Therefore, the first lesson in our story is that persistence is the key to success—a lesson as true in the digital age as it was back then.

Microsoft, arguably the most successful company of the 1990s, was such a juggernaut that at the turn of century federal judges felt obligated to break up the monopoly. What made Microsoft so successful? In a word, persistence. Steve Jobs, in a rare 1995 interview, emphasized Microsoft’s persistence, saying:

Microsoft took a big gamble to write for the Mac. And they came out with applications that were terrible. But they kept at it, and they made them better, and eventually they dominated the Macintosh application market, […] they’re like the Japanese; they just keep on coming.

Even Microsoft co-founder, Bill Gates, acknowledges persistence as the key to his personal and professional success. According to Gates, the best compliment he ever received was when a peer said to a group, “Bill is wrong, but Bill works harder than the rest of us. So even though it’s the wrong solution, he’s likely to succeed.” Just by keeping at it, Gates achieved an elite level of entrepreneurial accomplishment. But while persistence may be the key to success, it is not a panacea to cure all ills. Persistence can be misguided.

Being the best long-distance runners didn’t stop us from inventing the bicycle or the locomotive or the space shuttle. Humans separated themselves from other hominids through our ability to adapt—to build the tools we needed to thrive. At a certain point, our ancestors spread across the globe, adapting to changing environments. Early humans built clothes and dwellings to survive the polar ice; they developed agriculture to create stability where there was scarcity; and they developed civilizations and law and order to manage increasing tribal size. Therefore, the second lesson of our story is that we must adapt to an every-changing environment, in order to succeed. 

The two lessons of human success may seem contradictory—persist but always be changing; however, it’s a matter of balance. Peristence and adaptability are equally important, but persistence is broad; it’s goal-oriented. Adaptability is detailed; it relates to our behavior, the details of how we attain our goals. Finding a balance between the two is extremely difficult to achieve in practice. We often get caught in either the wrong goals or misunderstand right ones.

Warren Buffett once wrote to his shareholders, “When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance.” He was talking about the newspaper industry back in 2006, and his comments serve as important distinction between productive persistence and blind stubbornness—a distinction that goes beyond newspapers.

Kodak was in the photography business, yet, they lost site of their true goal, confusing it for a film business, and failure followed. The modern world of healthcare is criticized to have the same problem—promoting health care where they should promote health. It is easy to write that we should persist in our goals, but much harder to clearly define them; however, we are all decedents of the most successful creatures in the history of earth. Therefore, perhaps we are all bred to be successful (one persistent, yet adaptable, step at a time).

Asch, David A., and Kevin G. Volpp. “What Business Are We In? The Emergence of Health as the Business of Health Care.” New England Journal of Medicine 367.10 (2012): 888-889. (Source)

Carrier, David R., et al. “The Energetic Paradox of Human Running and Hominid Evolution.” Current Anthropology 25.4 (1984): 483-495. (Source)

Wilson, Edward O. The Social Conquest of Earth. WW Norton & Company, 2012.

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