Businesses and living organisms are both complex, adaptive systems. Yet enterprises are now disappearing faster than any other time in history: 32% of public companies will no longer exist in the next five years, according to Martin Reeves, director of the BCG Henderson Institute, and co-author of the book Your Strategy Needs a Strategy. The number represents six times the rate of failed companies 40 years ago.
The early demise of many companies can be attributed to a failure to adequately adapt to the amount, speed, and complexity of change across most industries, Reeves said.
“In the last couple decades, businesses have seen global economic integration, changes in demographics, and massive disruptions unleashed by technology,” Reeves said. “A parallel to that, it’s given rise to second order changes like competitive instability and blurring of industry boundaries.” Meanwhile, Brexit and the upcoming US presidential election are also triggering political uncertainty, Reeves said.
“All of that drives the speed and unpredictability of change,” Reeves said. “It changes the game of business–it’s no longer about optimizing a stable, predictable game, and knowing your competitors and the industry. It’s about surviving and thriving in an unpredictable game. That changes everything in strategy.”
Yet many companies continue using a classical strategy that does not fit the modern economy, Reeves said.
Technology leaders face a double-edged sword in this arena, Reeves said. “It’s better to disrupt than to be disrupted,” he said, and tech decision-makers are often on the side of the disrupters. “The thing to watch out for is today’s agile startup is tomorrow’s big company.”
As young, small companies develop into larger ones, they begin dealing with bureaucracy and other issues that come with rapid growth. And, while human selection bias leads us to focus only on the major success of the tech companies like Apple and Facebook, fewer than two out of every 10 new businesses will still exist within a few years.
Even if you do find success, “being disruptive doesn’t mean you’re equipped to be tomorrow’s disrupter,” Reeves said. “Once you’ve been successful, how do you walk away from comfort and the certainty of yesterday’s model and embrace tomorrow’s? If you don’t, you will be obsolete.”
Reeves and his team uncovered a predictable aging effect that happens to companies before they fail. It starts with introversion: Companies begin to look more and more inward, and cannot adapt to change since they are not looking at the bigger picture. Next, complexity becomes a problem: Systematizing management eventually becomes a drag on innovation.
Then, these companies find themselves in a success trap. “You may be experimenting on the margin, but basically your resources are increasingly focused on optimizing yesterday’s business model,” Reeves said. It’s a trap because, in the short term, it’s the best investment decision to put your funding in something that you are good at and is already well known. But it’s risky in the long term, because you aren’t building future growth options.
Companies that fall into that pattern sometimes go bankrupt, but more often are acquired by higher performing organizations.
Reeves examined some longheld systems in biology, sociology, and business, and found six factors that make an organism or business resilient and adaptive.
“You need buffers against change,” Reeves said. In a system with redundancy, if one component fails, another can step in and do the same job. For example, the human immune system uses multiple lines of defense against pathogens. Many companies maximize efficiency to the point of fragility–counting on one supplier for a part is easy, but if that supplier experiences a failure, so does your business.
Diversity in people, ideas, and innovations helps companies adapt to changes in their environment. The same principle applies to a virus that continues to mutate and persist despite vaccines.
Dividing up areas of your company into different components can ensure that if a disaster strikes one, it will not necessarily impact the others. “It’s the idea of fire brakes–you can stop the forest from burning down if you have modules,” Reeves said. This kind of thinking saved the Canadian banking system in the last financial crisis, because it was disconnected from US investments, he said.
4. Adaptability and creating feedback loops
A successful company can monitor changes, experiment, and innovate rapidly. “You must be able to learn faster than your competitors,” Reeves said. In nature, this correlates to natural selection and mutation. Many companies fail at being ambidextrous, or the ability to both run and reinvent your business at the same time. “It involves managing a contradiction: Squeezing every penny out of yesterday’s model, but planning for its obsolescence,” Reeves said.
“You can’t predict the future, but you can take out insurance against plausible negative outcomes.” Follow patterns of change and take precautions when you need to, Reeves said. This doesn’t mean predicting what technology will be useful in the future, but jumping on new tech tools right away while they are affordable.
Businesses don’t stand alone: They are embedded in a business ecosystem, in society, in the world. “In the long term, if you are not contributing to a sustainable environment and creating mutual gains, at some point you will be excluded or marginalized, or will spoil your own environment,” Reeves said. Articulating a purpose, or the intersection of what you can offer and what people find valuable, is key, he said.
You can watch Reeves’ TED Talk on this subject below.