RESPONSIVENESS, ADAPTIVE CAPACITY
Guitar Center, the nation’s leading musical-instrument retailer, is in trouble. For the second time last week as the troubled instrument retailer seeks to refinance and restructure more than $1 billion of debt. A report released last year by the Washington Post revealed electric guitar sales have plummeted over the past decade from about 1.5 million sold annually to just over 1 million. The two biggest companies, Gibson and Fender, are in debt, and a third, PRS Guitars, had to cut staff and expand production of cheaper guitars.
“I think the guitar market was built up into a bubble at a pace that was unsustainable,” said George Gruhn, owner of the Gruhn Guitars shop in Nashville. “It’s leveled off to something that reflects more normalcy. Factories that were designed to produce 100,000 instruments a year may now find that their demand has dropped to 75,000, and that’s a problem because now you have higher overhead.”
Shifting demographics — No more guitar heroes
The guitar is facing an identity crisis. Guitar heroes — who have inspired many a player and fueled strong instrument sales — are few and far between these days, according to Gruhn. “I would be hard-pressed to name any new ones,” he said.“Most of what’s really selling today is rap and hip hop,” “That’s outpacing other forms of music and they don’t use a lot of recognizable musical instruments.”
WHY COMPANIES DIE AND CITIES SURVIVE
Why are cities like Rome, Jerusalem, Athens going on for hundreds or even thousands of years, while companies will flame out within a single recession or policy change? It’s hard to kill a city,” “but easy to kill a business.” Companies’ mean life is ten years. Cities routinely survive even nuclear bombs. You can drop bombs on a city and, 25 years later, they’re all right — typically.
Most of the driving questions that went into thinking about the application of biology to cities and industries are why is it that almost all industries collapse while cities carry ahead, whatever? Many bodies of society do so. What kind of dynamic is that? What you need is a stock price fluctuation, and you lose a TWA or a Montgomery Ward.
CITIES ARE ANTI-FRAGILE
Cities live because they never give up the generator function of the “scenius” as raw exploration of possibility space and all the things that it generates in exchange for local selective advantage if that selective advantage is only in the form of rivalry.
The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes, the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance… even our own existence as a species on this planet.
The natural tendency of the city’s enlarged community is to increase the intensity and speed up functions of all kinds, whether of speech, or crafts, or currency and exchange. That, in effect, means an eventual expansion by subdivision or, what’s the same thing, new development of such acts. And even though the town was built as a kind of defensive cover or shield for man, this defensive covering was bought at the cost of maximized struggle within the walls.
Games of war like those described by Herodotus started as ritual blood baths between the citizens. Rostrum, the courts of justice, and the economy all created the extreme appearance of competitive rivalry today dubbed “the rat race.” Indeed, it was in the middle of these irritations that man made his greatest discoveries as counter-irritants. Such innovations were self-extensions by intense toil, through which he intended to neutralize pain.
As a component of the legislative structure, the city reacts to new demands and irritations by resourceful new extensions, often in an attempt to maintain staying power, constancy, equilibrium and homeostasis.
Formed for protection, the city generated unexpectedly fierce intensities and new hybrid energies from the accelerated interplay of functions and knowledge. It burst into violence. The village alarm, followed by the city’s resistance, expanded into empire exhaustion and inertia. These three stages of disease and irritation syndrome
The City — with the capital C, as the general form of human settlement, as the ecological niche of our species — belongs to the world of anti-fragility. It is a system that has proven through history to be capable to adapt, self-organise, improve and take advantage of the unpredictable, in short to prosper in disorder.
Companies want to be like cities, with ever increasing productivity as they grow and potentially unbounded lifespans. Unfortunately, Geoffrey West et al.’s research on 22,000 companies shows that as they increase in size from 100 to 1,000,000 employees, their net income and assets (and 23 other metrics) per person increase only at a 4/5 ratio. Like animals and cities they do grow more efficient with size, but unlike cities, their innovation cannot keep pace as their systems gradually decay, requiring ever more costly repair until a fluctuation sinks them. Like animals, companies are sublinear and doomed to die.
The strong version of this proposition is that transmogrification — the translation of energy from the energetic to the informational or from the rivalrous to the anti-rivalrous — is precisely what makes cities survive
COMPANIES VS CITIES APPROACH
Sensitivity to the World Around Them
Companies have Narrow-band filters based on standard sensing channels VS cities unpredictable and broad range of signals that change/shift with VUCA. As cities grow, that opens up more and more. Cities become multi-dimensional, in contrast to companies, which become more unidimensional.
Cities are really not top down. There’s an administration, obviously, but they’re facilitators. They don’t really control the city. Quite the contrary: They’ve got an open ended vision. They operate as top-down organizations that strive to increase efficiency and minimize costs so as to maximize profits. In contrast, cities aren’t driven by a profit motive and balance their books by raising taxes. They operate in a much more distributed fashion, with power spread across multiple structures.
Awareness of Their Identity
Companies see you in terms of familiar tropes, cliches, and models whereas cities hold up many different mirrors; showing you unexpected aspects of yourself.
Tolerance of New Ideas
In a great city, anything goes, at least in principle. New York, London, and other great cities have this characteristic that they somehow encourage maverick, slightly deviant behavior that in some cases lead to criminality but in many cases is exactly the source of its great creativity, success, and attractiveness.
Companies preside over a literary industrial complex. A real trove of warmed-over ideas while cities have a varied treasure of a chaotically changing set of ideas. In his research West found the relative amount of capital allocated to research and development decreases as the size of a company increases. The idea here is that the investment in innovation doesn’t keep up with other operating expenses as companies get bigger.
Cities become ever more diverse as they grow. Their spectrum of business and economic activity expands as new sectors develop and new opportunities present themselves. In this sense cities are prototypically multidimensional, correlated with their superlinear scaling, open-ended growth, and expanding social networks.
Valuing People, Not Assets
Companies see labor as a priced asset refined whereas cities see human as complex systems. No wonder cities have continued to grow. When we move to a city within an urban system that is twice as large, we become, on average, 15% more wealthy, more productive, more creative…and we do this using a fraction of the infrastructure.
No single group has absolute control. As such, they exude an almost laissez-faire, freewheeling ambiance relative to companies, taking advantage of the innovative benefits of social interactions whether good, bad, or ugly. Cities are places of action and agents of change relative to companies, which by and large usually project an image of stasis unless they are young.
Loosening Steering and Control
Companies usually follow late-industrial playbooks whereas cities follow a large variety of approaches and a fundamentally improv approach
Organizing for Learning
Companies generally use MBA learning mindset; closed-world “playbook” while cities follow a more eclectic hacker approach to learning; open-world “what works” for a given place in a specific context
One of the fantastic things about a city is that it tolerates weirdness: people pushing the boundaries of the arts and culture, science, business. A great city’s administration facilitates that in one way or another. This is in complete contrast to companies. They want uniformity and efficiency. There’s this culture that almost inevitably develops of suppressing crazy people wandering down the hallways of a major company.
Unlike animals or companies, cities do not slow down as they get bigger. They speed up with size! The bigger the city, the faster people walk and the faster they innovate. All the productivity-related numbers increase with size — wages, patents, colleges, crimes, AIDS cases — and their ratio is superlinear. It’s 1.15/1. With each increase in size, cities get a value-added of 15 percent. Agglomerating people, evidently, increases their efficiency and productivity.
Every company — regardless of business type or business model (i.e. product, SaaS, service, media, etc.) — will go through a highly predictable cycle of growth and maturity called the S Curve of Business.
As we have seen over and over again, incredible development can be possible in the short term, but sustaining the pace without confronting periods where development spikes just don’t happen. The business is wavering. Competitors adapt to stay competitive and approach the consumers. Your cutting-edge technology is just not as spectacular and innovative as it used to be. Learning how to manage the S Curve of Business and learning where you need to jump to the next S curve is the foundation for success.
The reality is, in the end, every organization runs into problems. You have the trade-off between maintaining the resources and attention capacity for the generator function to modify, upgrade and edit the effectiveness and efficiency of the phenomenal schema and what ends up happening is you find that you have no use for some of the adaptive capabilities and sort of let them atrophy.
As that company grows and becomes more established, market forces typically narrow its product space. It goes from being multidimensional to unidimensional in terms of the number of products. Ones that sell well get reinforced, and the ones that don’t — even if they are great ideas — have to be put on a shelf and forgotten. As the company grows, this space narrows and they become less diverse.
What ends up happening is that this actually becomes a waste you don’t need to have the ability to edit and update your generator function because all you have to do is you just keep pushing more and more and more into the surface layer that you become the most effective saber-tooth Tiger which is perfect unless the hill changes or the weather patterns shift .
WHEN COMPANIES PLATEAU
So how can you be falling behind? What do they have that you don’t?
This is that that moment from the movie the matrix where there’s the line
lieutenant your men are already dead
You don’t know it now but you’ve got a whole bunch of well-trained well-armed cops getting ready to go in and fight with one little girl. What you don’t know is that the company and your a saber-tooth tiger are dead,
We know that, like many species, The Saber tooth Tiger doesn’t keep its capacity constant in the face of changing circumstances. Instead, it tries to adjust capacity so as to produce the right quantity of output at the desired level reality adjustment.
But this is the moment in which everything is about to go away because you don’t know that you’ve externalized your fundamental generator function into what is about to become an obsolete set of schema. The reason you don’t know it yet is because the signaling mechanism that phenomenal-noumenal gap has separated out and the signaling mechanisms that actually are able to come all the way back and make it conscious that there’s something wrong are dwarfed by the signaling mechanism happening at the surface and everything is copacetic.
Doubling Down On Leader as Shaper Of Change
The first response is positioning top-down initiatives dependent on return to “normal” Organizations in situations like this often double down on outdated strategies or reflexively reach for unrealistic strategic aspirations. They tout values and missions to rally confused employees. When employees perceive duplicity between their organization’s stated identity and actions, they eventually follow suit.
Immediate action is critical, but everything is framed in the context of the “next cycle of growth” But the future is not what it used to be. When there isn’t consistency between an organization’s stated mission, and values, and the way it is actually experienced by employees and the marketplace, we found it more likely to have people withhold or distort information.
When accountability processes are seen as unfair, people feel forced to embellish their accomplishments and hide their shortfalls. That sets the stage for dishonest behavior. There’s a direct correlation between an employee’s sense of fairness and a conscious choice to sabotage the organization.
The innovative part gets pushed back on the back burner, with the idea that it isn’t needed now and the important thing is to continue to produce products; that they’ll return to that in a couple of years after they’ve recovered. That typically does not happen.
When cross-functional rivalry or unhealthy conflict is left unaddressed, an organization is more likely to have people withhold or distort truthful information. Fragmentation, especially across divisional lines, creates dueling truths. Divisional loyalties paint those outside as enemies to be feared, resented, or blamed.
RESPONSE AND LEARNING
Optimization and efficiency are synonyms for fragility. Flexible systems can take advantage of opportunities and respond to crises in ways that optimized systems cannot. Build for flexibility and speed by keeping excess resources in the right places. Respond to crises before they occur. Look for data to foresee what’s coming. Invest in possible futures; waiting for certainty means losing to faster competitors.
The question becomes, is it possible to set up a system for learning from history that’s not simply programmed to avoid the most recent mistake in a very simple, mechanistic fashion? Is it possible to set up a system for learning from history that actually learns in our sophisticated way that manages to bring down both false positive and false negatives to some degree? That’s a big question mark.
Designing for Continuous Adaptation: Plant Seeds, Harvest Volatility
When the dust settles, it becomes clearer that, in most sectors, Crisis don’t fundamentally change the future but rather accelerates it. How can one take advantage of market dislocations to cheaply place directional bets and advance durable moats?
The fatal flaw for businesses is to assume that there will be a single new normal. Uncertainty means there will be a succession of new normals as countermeasures are continually developed, implemented, and refined. Each new normal potentially requires a different strategy and set of tactics.
Businesses must redesign themselves to be flexible enough to pivot repeatedly and unpredictably. This redesign should touch strategy-setting approach, goal-setting methods, incentive structures, hiring processes, and workflows. One normal: Adaptedness. Many normals: Continuous adaptation
The key feature of cities as amorphous organizations is that membership is continuous, not binary: an individual is not in or out of the organization rather, he’s is closer or farther from the core of the organization
The less specifically defined the organization’s membership requirements — the more varied the applicants will be and the more complex their means of engaging in the group.
Diversity is frequently interpreted in terms of a limited number of measurements, such as class, age , sexual identity, history in schooling, and so on. Participants close to the heart of the city (maybe those collaborating alongside each other on several projects) are more obviously engaged — but those lurking far from the center (maybe not currently participating on any projects)
Cities are likely to be able to respond to unexpected changes in the market climate. This is a corollary of greater multidimensional complexity. If the rapid shift in the world causes a need for someone with experience X so it is more likely that anyone like this would already be around.
Naturally, the amorphous structure is less legible and understandable — its characteristics are less evident at any moment, and are more likely to evolve over moment. The internal information (its tools and how it works) is more likely to stay implicit and be kept in the minds of the members rather than being made clear in outsourced ways such as organizational maps, specified positions, standard procedures manuals. If the amorphous entity absorbs members, the amount of implicit organizational knowledge that members need to carry is not that linearly but geometrically, and would soon surpass efficiency.
Some are perfect for the situation right now (very adaptive, “high quality”) and some are not so good at the moment (maladapted, “poor quality”). The normal inclination is to filter for good consistency, with the cream to only operate with the cream — this inclination persists at the corporate as well as individual level. Particularly the latter: no high-quality participant wants to get polluted by participants of low quality.
Conventional organisations strive to be strongly adaptive and homogeneous, since they pick themselves and seek adaptation. As I wrote earlier, “preparing for volatility looks hare-brained, unsustainable and inefficient, and “people who focus on optimizing productivity during predictable periods usually succeed in slowly grinding out of a market adaptability because it looks like inefficiency”
The new standard will not be entirely linear, and will last for an unknown time. In this unpredictably evolving climate, participants who are ill-suited to the present state of the environment may be suited to a potential (but still unknown) state of the world — that is, they may be of poor quality now but later of high quality. A company can become highly adaptive, but later weakened if it now filters only for high-quality participants.
How can an organization design itself to accept persistent inefficiency so that it preserves its capacity for response and adaptation to uncertainty? Really, this is a question that organizations everywhere — including, for instance, national governments which chose to defund expensive and apparently pointless emergency preparedness programs — could be asking themselves.
Restructure as a Small-World Networks
Horizontal Gene Transfer (HGT) is used to transfer antibiotic resistance allowing genes to spread horizontally through species of bacteria. The small-world network of these species of bacteria is more immune to shocks as they survive the death of one species without losing vital input into the mutation-holding eggs in other baskets. In this way, antibiotic-resistant bacteria on modern drugs have remained ahead of pharmaceutical R&D.
Most corporate organizations use a strict hierarchy structure that heavily prioritizes efficiency over robustness by knowingly or unknowingly adopting a scale-free network structure. They have high clustering but not enough robustness to shocks.
However, a Small-World Network has enough clustering AND enough shock-robustness due to multiple cross-cluster links. That’s why evolution adopts this structure in many socio-cultural systems like social networks and epidemics. This structure is inherently resilient to unpredictable breaks and shocks — such as those businesses are witnessing in this crisis within supply-chain, internal operations, product innovation, and brand management.
- Create internal incubators & programs to unleash experiments & small investments without approval with recognition that the “business cases” may be unclear
- Identify “reality gaps” between informal credibility & formal authority. Consider firing senior execs with large gaps
- Identify & elevate important “nodes” from informal networks Create mechanisms for small cross-functional teams to emerge around new problems
- Have senior people spend more time with front-line workers than seems normal
- Push down decision making to lower levels in the organization when possible
- Regular assessments of fragility of the organization through lens of company and making it robust to shocks, that’s complexity theory in addition to financials, strategy, plans
EXPERIMENTATION AND INNOVATION
Cultural Fringe as Free R&D
Brilliant minds around the world are experimenting with innovative ways of social engagement and community-using them as free R&D. Look for the overlap of successful fringe experiments, the interests of your audience and your capabilities. Which are you able to help people with already? Tinkering playful exploration will feed your loop and give birth to these discoveries as new truths (opportunities).
Mistakes and Improv as Fuel in a Crisis
We are terrified of mistakes, yet in improv they are fuel. Mistakes, and how participants respond to them, are the brilliant and subtle ways the performers say ‘yes’ to whatever happens, no matter how ‘strange’ or ‘wrong’ it may seem to the judging mind, creates an environment of shared play for players and audience alike.
Uncomfortable at first, real power comes from not knowing and acknowledging where we are, in this moment. From there, anything is possible. The “goal” of improv is not about getting a laugh, instead it is about finding shared connection and understanding. It is recognition of our shared reality.
Failures happen all the time. Once every while an outlier return when a learning is applied and a new product, business or even market lifts off. Failed wallpaper cleaner to new toy market. Failed sanatorium diet to global breakfast cereal. Failed radar experiment to new class of kitchen utensils. Failed hypertension medicine to global market for ED cure etc
Unlock Shadow Assets & Opportunities
As Kevin Kwok has written, “it’s very hard to find a successful marketplace that wasn’t built on an underutilized fixed asset.” The famous example is AirBnB or Uber using software to unlock two underutilized assets — houses and cars.
Developing the Uncertainty Mindset
Assumes future world-states and probabilities are knowable and known. Believes that uncertainty is always bad. Acts to eliminate external uncertainty (business environment) wherever possible. Acts to eliminate uncertainty from internal operations wherever possible.
Assumes future world-states and probabilities are partly unknowable. Believes that uncertainty can be productive (by driving innovation and adaptation). Acts to understand external uncertainty and build appropriate adaptation strategies. Acts to introduce carefully-designed uncertainty into operations (especially in goal-setting, hiring, motivation).
Organise for Human Needs
The Unknown Disrupts Your Intuitive Model
The Unknown interferes with your Intuitive model. The best way to keep the company resilient and supple in the face of adversity is through repeated and deliberate interactions with the unknown. When the Unyielding Variable emerges, it inevitably disrupts many layers of the logical paradigm. This can be addressed either by closer involvement of the unknown, which will lead to further disruption or by w to further disruption or by working around the disruption.
Working around the disruption will cause the Unyielding Unknown to manifest again in even more destructive forms. In the face of intuitive model disruption, Narrative is the fastest effective tool. It is good that companies fail, by the way. You don’t need those dinosaurs hanging around. We don’t care about the companies, we care about the people, everyone from the CEO. That’s who we care about. We care about producing new ideas, creating wealth, and innovating. When you have an institution that behaves despotically, either consciously or unconsciously — then get rid of it.