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Geoffrey West on the Life and Death of Companies
We can’t wave a magic wand and innovation will get us out of the predicament we are in. That’s totally naive. Innovation will play a critical role, but it isn’t just innovation alone that is the solution.
Those were some of Geoffrey West’s closing remarks when I spoke with him earlier this week. The idea stuck with me. What use is innovation if it has no application—no force behind it, committed to its successful deployment? We’re optimist-deterministic at Percolate, meaning that we believe the future will be better than the present, but it’s on us to make it happen.
Mind you, West made this comment while admitting he was pessimistic about our current trajectory for sustainability in our environments, financial markets, and natural resources. But his justifications, body of work, and passion for people capture the determinism required for building a brighter, better future.
His comment also captures the essence of why we invited Geoffrey West, a theoretical physicist-turned-biologist-turned-urbanization expert and former president of the Santa Fe Institute, to speak at the Transition Conference on September 24th.
Marketers sit at the center of a transforming world. We’re seeing a growing global middle class, we’re moving towards a universally connected society, and we’re seeing software increasingly become the operating layer across nearly everything. It’s the marketing function—which touches every area of a company, including its customers—that will have the greatest opportunity to innovate, strive for new ideas, drive change, and connect with a rapidly expanding addressable market.
My conversation with West contextualized why applied innovation is so important. Innovation allows cities—and can allow a company—to adapt, evolve, and survive. To understand the weight of that idea, it helps to understand Geoffrey’s work and the path he took to become one of the world’s leading thinkers in urbanization.
As a biologist, he was particularly interested in scaling—the underlying laws that govern life in all forms as they grow, live, and die—and the fundamental role it plays across nature and the evolution of the universe. Using techniques from his prior high-energy physics studies, he was was able to establish that these fundamental scaling laws exist and that these regularities seen in biology have their origins in fundamental, generic mathematical properties that sustain life. He found that this theory, put into mathematics, transcends design. The same laws apply to trees and plants as apply to mammals, fish, and birds.
It wasn’t long before he started wondering if they applied to anything else. For instance, cities and companies have much in common with organisms, West said.”The question was, can that the same kind of the math and the theory be applied to cities and companies? Are there underlying laws that are constraining the underlying growth of cities and companies?”
West discovered that cities abide scaling laws, as do companies. But West discovered it was far more complicated; where in biology you have infrastructural networks—like neuron pathways in the brain or protein connections in DNA— cities and companies have both infrastructural networks and social networks between human beings that participate in those systems. It’s social networks that dictate the scale—and survival—of cities and companies.
West started the research with a big question: “Why is it that cities are very robust and viable and very few actually die?” he said. “Even when you drop an atom bomb on them they bounce back. But companies, like organisms, are relatively fragile. Not very many companies last very long.”
His team analyzed about 30,000 publicly traded companies in the U.S. over the last 60 years and found that the average lifespan of a company already on the stock exchange is about 10 years. Very few last 100, 200, or 300 years and only an extremely few last 400 years.
What is the difference? Why do cities live forever and companies don’t? It has to do with the ability to generate ideas.
“The thing about cities that is so extraordinary is that a city is very open. It is not controlled top down—of course there is a mayor and city councilors and so on—but in terms of its actual life, the spirit, the soul, the buzz, that all comes from the open-end social interactions that the city not only manifests, but also enables.
“In fact, that’s the whole point of a city, it’s this extraordinary invention that we stubbled across to bring us together and to take advantage of economies of scale.”
In a city, there are simply more minds, from more places, with more perspectives interacting in the same place—and it leads to sustained growth.
“If you bring more people together you have more interactions and therefore create more ideas and more wealth. You encourage entrepreneurship and you have this positive feedback loop that is manifested in the scaling laws, but underlying that is the positive feedback mechanism manifested in the social network dynamic. And that has led to this continuous, open-ended growth that has been continuing at an exponential rate.”
West’s work revealed that a city’s openness led to extraordinary diversity, in almost any dimension. As a city grows the dimensionality of its characteristics across various metrics are continuously increasing, at predictable rates, including innovation.
Take patent production, as a proxy for innovation. The number of patents created in a city increases with the size of the city. As a city grows it encompasses extraordinary diversity or, in other words, a tolerance for extremes. Extremes—especially things like homelessness, hunger, or mental illness—represent a boundary for the majority of a city’s population. Those make space for creative thinking, the cultural foundation that allows more and more ideas to develop.
Therein lies the contrast to a company. While a city is continuously becoming multidimensional, a company is typically becoming more unidimensional, narrowing its activities or products over time because of its market. Companies put resources towards what is most successful, and as they grow they build bureaucracy. It forces companies to think in the short-term, placing emphasis on controlling costs and creating economies of scale. They have to invest in quick success and operational maintenance.
Unlike the open social networks of cities, “that pressure tends to dominate the positive feedback mechanisms that are involved in the exchange of information that lead to innovative ideas and creativity,” West explained. “If you look at all of the biggest U.S. companies, those that have lasted around 100 years (some more, some less), you’ll see that, relative to GDP, they’ve all stopped growing. None of them are growing. You also see that they behave like organisms. We stop growing and of course we eventually die—as with these companies, they become too big for being able to easily adjust and ‘reinvent’ themselves, spur a major innovation, or open up again into the marketplace. Now there are exceptions to that, but the general rule is that companies tend to get stuck and die. They just aren’t quick enough, and timing and speed are important for survival.”
The astounding fact, despite this trend, is that most companies have abandoned or significantly reduced their research and development departments. “It’s all part of cutting back, creating economies of scale, looking short-term, and being unwilling to think strategically. Despite all the hype that is given to long-term thinking and taking risk, none of the big companies ever do, so in that sense a company would deserve to die…You don’t want to discourage innovation.”
Where in cities, new ideas and creativity are born from the constraints set by living with extremes and fighting to stay out of the fringes, companies can and should let the boundaries enable innovation. Companies, beholden to investors, customers, and employees, must serve a specific function, inherently closing them off to extremes—or the risky bets on the long-term. But it doesn’t preclude them encouraging diversity, building social networks, and facilitating an open exchange of ideas.
Marketers are under enormous pressure to prove value, especially now at this moment of transition. Their addressable markets are growing globally at exponential rates, they have more channels to reach that audience, and their technology is opening the floodgates to the use of data. The greatest temptation for marketers is to go all-in on short-term endeavors that show immediate results. But the empirical evidence shows that long-term investment in innovative ideas is what grows brands. That’s why applied innovation is so important. It manifests itself in strong brands, which organize for diversity, enable social networks, and construct positive feedback systems that keep growth constant.
Join us on September 24th as Geoffrey West dives into the natural laws that dictate how everything—companies, cities, and organisms alike—adapt and survive. We’ll see how the rapidly transforming world we live in is profoundly changing what it means to be a marketer.