It’s a Jungle out There
Roger Lewin

New Scientist, 18 October 1997, pp 42-46

No one questioned that the NeXT workstation, the brainchild of Apple Computer cofounder Steve Jobs, was technologically superb. Powered by chips from Motorola, the hyper-chic-looking machine was easy to use, had multimedia capabilities, and was far more advanced in many ways than its competition. And yet, when Jobs launched his brilliant creation in late 1980s, it became merely a curiosity cherished by a few devotees rather than achieving deep penetration in a lucrative market. Despite its technological superiority, NeXT was a commercial failure.

Similarly, Digital Equipment Corporation developed its Alpha chip half a dozen years ago, and correctly boasted that it was the fastest microprocessor in the world, out pacing its nearest rival by more than a factor of three. But there were few buyers. The Alpha is still ahead in the race for speed, being twice as fast as the Intel Corporation’s popular Pentium chip. But, despite a mammoth marketing effort by Digital executives during the past 12 months, the Alpha is still an also-ran in terms of market share (1 percent as opposed to Intel’s dominating 92 percent).

What do these tales of commercial woe have to do with the failure of, say, an exotic, superbly adapted seed-eating bird to become established in the highland forests of Hawai’i? "Everything," says Stuart Pimm, an ecologist at the University of Tennessee, in Knoxville. "You are dealing with system-level effects," explains Pimm. "The behaviors of such systems are unpredictable and often counterintuitive."

The notion of using ecosystems as a metaphor for business systems might seem bizarre, because the latter have long been spoken of in terms of smoothly running machines that are driven to specified goals under the direction of all-knowing, all-controlling CEO’s. That doesn’t sound like an ecosystem. And yet in an article on the fast-paced world of high-technology companies published last year in the Harvard Business Review, the Santa Fe Institute economist Brian Arthur used the term ecosystem (or its derivatives) seven times. Similarly, one of the best-selling business books in the United States during the past 12 months is called The Death of Competition, with the subtitle, leadership and strategy in the age of business ecosystems. "Leaders who learn to understand...ecology and evolution will find themselves equipped with a new model for devising strategy, and critical new options for shaping the future of their companies," writes its author, James Moore, a business consultant in Cambridge, Massachusetts. Even the oh-so-conservative Wall Street Journal recently carried an article by John Baden, of the Foundation for Research on Economics and the Environment, with the following revolutionary statement: "When we understand that the economy is an ecosystem--not a machine isolated and insulated from the environment--we grasp fundamental truths about what makes the economy work."

Something is apparently changing in the world of business, with this emerging biological metaphor for describing how companies interact with each other like species in ecosystems. And it will mean two things. First, CEO’s will have to get used to thinking of their companies as being more like living organisms in communities than mechanical machines, which changes the nature of their economics. And second, CEO’s have much less control over the day-to-day life and long-term fate of their companies than they have liked to believe.

There are striking parallels in a shift that is going on in business and ecology, in the way leading practitioners describe their disparate worlds. At its simplest, it is a shift from viewing the world as simple, predictable, and settling to equilibrium; to acknowledging that it is complex, unpredictable, and far from equilibrium. It is also a shift from head-to-head competition as being viewed as the key force shaping the business/ecological community, to recognizing that each is a complex dynamical system in which competition is just one of many factors that influence the life of the community. Other factors, such as predation and population fluctuation, combine with competition to generate unpredictable emergent patterns in the community.

In ecology, the traditional view was encapsulated in the comforting phrase, The Balance of Nature. "Ecologists didn’t deny that complex dynamics exist in nature," says Pimm, who wrote a book that carried this phrase as its title, "but they explained them as the result of genuinely unpredictable factors in the external world, such as fluctuations in climate. More and more of us are beginning to realize that these behaviors are emergent properties of the internal dynamics of the system itself."

One such property is the above-mentioned ability of an established ecosystem to exclude a would-be invading species, despite its being competitively superior to its potential rival within the community. The network of species’ connections of a mature ecosystem, of which the would-be invader’s rival is an established part, protects the incumbent species from outside competition. "The potential invader has to be very much more competitively superior, if it is to surmount this system-level effect," says Pimm, who is a theoretical ecologist as well as a welly-boot wearing field worker. He has seen this system-level effect many times in ecosystems simulated in the computer, and in real habitats in Hawai’i.

For example, "More species of birds and plants have been introduced into Hawai'i than anywhere in the world," explains Pimm. "But there are two separate ecological worlds. There's the highland region, which is still pristine, with native plants and birds having formed a tight network of connections over a long period of time. Relatively few species have successfully invaded here. And there's the lowland region, in which human settlement has disrupted established communities and made them vulnerable to invasion, because the ecosystem network is poorly formed."

Pimm’s statement about the requirements of a successful would-be invader in ecosystems is echoed with eerie similarity in Arthur’s HBR article, when he comments on the commercial failure of NeXT: "A new product has to be two or three times better in some dimension--price, speed, convenience--to dislodge a locked-in rival." Again, a network of connections in the form of usually informal alliances between key companies, such as Microsoft, Hewlett-Packard, and Intel, repelled the would-be invader. The same technological ecosystem excludes Digital’s Alpha chip from gaining a foothold.

Another important unpredictable, emergent property in ecosystems is foodwebs, which describe the patterns of interaction among the species within the community--these involve primary producers, herbivores, carnivores, parasites, and so on--or who eats whom. Not so long ago, ecologists believed that there was an infinity of foodweb patterns, because of the many possible combinations within a community of even modest size, say fifteen species. Not so. "The remarkable thing about foodwebs is that they have just a few major characteristics," observes Pimm, "such as the length of the food chains (a progression of who eats whom, from the bottom of the foodweb to the top), and the ratio of predator species to prey species. You see common patterns wherever you look."

Because of the complex network of interdependence that these deceptively simple patterns represent, it is extremely difficult to predict the outcome of simple changes within the community, such as the introduction of a new species. "Sometimes the community may be affected very little," says Pimm. "Other times it might cause cascades of local extinction. You usually cannot predict."

The intellectual shift in ecology, therefore, is one of a deeper understanding how the real world works: it is a whole lot more complex than was once realized. In the business world, by contrast, the shift is of both perception and reality. The equivalent of foodwebs in the business world are economic webs, which describe patterns by which companies do business with which other companies, and how.

Economic webs have always existed in society, of course. But in today’s fast-moving, high-technology economy, their patterns are much more complex than they once were, and the patterns change more rapidly, too, as companies break old alliances and form new ones in their quest to survive and thrive. The manoeverings of Microsft and Netscape in their separate struggles to dominate the Internet is a good example. And yet web thinking--or ecosystem thinking--is only now beginning to emerge in the business environment.

"The way to think about economic webs is in terms of niches around some kind of activity," says Arthur’s Santa Fe Institute colleague Stuart Kauffman. "In the days before the automobile, transport centered on the horse-drawn carriage, which required wheelwrights, blacksmiths, saddleries, wayside inns, and so on." This was the horse-drawn carriage ecosystem. "When automobiles arrived, a whole new ecosystem coevolved, requiring paved roads, gas stations, motels, and so on, which replaced the previous ecosystem."

The newly emerging web thinking is seen by some as the way of the future. For instance, John Hagel, of the management consultants McKinsey and Company, last year wrote an article in the company’s quarterly journal, which he titled Spider versus Spider. Web thinking, he opined, "may even represent the opening salvo in the transition from industrial-age to information-age thinking," The reality of complex economic webs, or business ecosystems, changes the way companies operate strategically, if they are to survive in a turbulent, fast changing environment.

"In the new world, strategy based on conventional competition and cooperation gives way to strategy based on coevolution," is the way Moore describes the change. "Web strategies turn traditional strategic thinking on its head," says Hagel. "The conventional approach dictates that firms first define their own strategy and negotiate alliances that are consistent with this strategy and advance its aims. Web strategy asserts that the two basic choices confronting senior management are which webs [or ecosystems] to participate in (or to form), and what role...to play in them. In other words, firm strategy follows web strategy." Intel and Hewlett-Packard have embraced web strategy, but they are pioneers, not yet mainstream.

Two other business theorists, Adam Brandenburger and Barry Nalebuff, at Harvard and Yale Universities respectively, describe the new business world in yet another way. "Most business succeed if others also succeed," they wrote in an influential book published last year. "It’s mutual success rather than mutual destruction." Competition is part of the picture, of course, but only a part. Cooperation and building mutually beneficial networks is important, too. Brandenburger and Nalebuff use the term "co-opetition" to describe this joint strategy, a word coined by Ray Noorda, founder of the networking software company Novell.

For many traditionalists in business and economics, it’s

this death of old-style, head-to-head competition as the number one route to success that will prove hard to swallow. But that’s scarcely surprising, because the idea goes all the way back to the 18th century and the ideas of Scottish economist Adam Smith. Smith argued that if individuals are left free to pursue their own selfish interests, patterns of economic activity would emerge that would serve the greater good, guided, he said, "as if by an invisible hand."

Almost a century later later, Darwin incorporated Smith’s thinking to biology, in his theory of natural selection. The core of the theory is that individuals act in their own interests, from which the evolutionary patterns we see in the world arise. Competition in this context includes whether one species or another of, for instance, a seed-eating bird will dominate in a particular ecosystem. The invisible hand at work again, this time in the biological realm.

It is therefore ironic that modern economists embraced Darwinian metaphors earlier this century, raising the notion of the survival of the fittest through bitter competition to the level of a business law, and apparently believing that their business theory was being inspired by laws of nature. In effect modern economists were embracing Adam Smith’s economic theory, but in a modern, biological guise. The irony doubled, however, because just as Thatcherism was elevating the power of competition to dizzying new heights in the late 1970s and 1980s in Britain, ecologists were engaged in a fierce and sometimes acrimonious debate over whether competition really was the all powerful force traditional Darwinism held it to be. After the feathers settled, there emerged a new view of the world in which competition between species was just one of many factors that shape ecological communities.

The rest of the world has been slow to catch up with this new perspective, says Wolfgang Wieser, a zoologist at the University of Innsbruck, Austria. "To most people, evolutionary theory is still dominated by the ideas of competition... and survival of the fittest." So it is among business theorists and practitioners.

So, CEO’s have their work cut out. Companies can benefit from "species level improvement in the Darwinian, self-centred sense," says Moore, but this is of limited value in the longer term. The more important challenge is to create opportunities and adapt to changes in a complex network of other companies that might sometimes be cooperators, sometimes competitors, and sometimes both at once. In other words, competition as we know it should be allowed to die. "The new paradigm requires thinking in terms of whole systems," says Moore.

Hagel also believes the simple Darwinian metaphor is of limited value in an increasingly high-tech world. "Webs emerge from the turmoil wrought by uncertainty and change," he says. "They spread risk, increase flexibility, enhance an industry's innovation capability, and reduce complexity for individual participants." And, in a phrase that contains interesting biological overtones, Hagel states that "the more companies--and customers--that join, the stronger the web becomes." Although there is still debate on the matter, many ecologists believe the more species there are in a community, the more productive and stable the community can be.

Just as the idea of economic webs is forcing companies to change business strategy, so too is it changing the nature of prevailing economics. Mainstream economic theory has its roots in the smoke-stack economy of the Industrial Revolution, and is based on the production of commodities, such as coal and iron. Formalised in the late 19th century by the economist Alfred Marshall, this said that the more coal you dig, the more you are forced to exploit less favourable resources, and so the return for your effort is reduced; and as you are in competition with other coal mines in the same predicament, prices become squeezed down close toward the average cost of production. This phenomenon, known as diminishing returns, became a central pillar of modern economics.

Now, says Arthur, a different economic phenomenon is emerging, which he calls "increasing returns." Although held to be impossible under traditional economic theory, increasing returns makes perfect sense in ecosystem view of businesses. "Increasing returns are the tendency for that which is ahead to get further ahead," explains Arthur. "If a product or a company or a technology--one of many competing in a market--gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market." As a result, a company can make a financial killing, even if its product is competitively inferior. This is a system-level effect, where the inferior product survives and thrives because it is linked to many other products in the community, thus excluding competitors. Increasing returns would not happen--could not happen--in Marshall's world of perfect competition.

One of the best examples here is the dominance of Microsoft's disk operating system, or DOS. Widely recognised as inferior to other operating systems--it was often derided as Dreadful Operating System by officianados--it nevertheless prevailed and came to dominate the market. In the early 1980s, DOS was one of three competing operating systems, the other two being CP/M and Apple's Macintosh system. CP/M was first onto the market, and was well established when its competitors arrived. DOS was born from some clever manoeverings by Bill Gates, which included striking a deal with IBM for supplying an operating system for the IBM PC.

For a while, it was unclear which system would become dominant. However, both IBM and Apple encouraged the development of their separate ecosystems, establishing networks of committed users and, more importantly, software suppliers that wrote to DOS or Macintosh standards. Two technological ecosystems emerged, with very different cultures, with DOS becoming the 800 pound gorilla in the market place, through being protected within its ecosystem that Microsoft helped develop. Apple thrived in its own, smaller, ecosystem (for a while at least). And CP/M became extinct. The bottom line here is that although the theory of increasing returns predicts that one system was likely to lock-in eventually, it cannot predict which one it would be, based on the technical merits of each.

These parallels between business comunities and ecosystems are intriguing, and, as Moore says, biological metaphors have a particular attraction for business people. But how useful are they in trying to understand the dynamics of the new network economy, through drawing on what is known in ecosystems? If the similarities between the two worlds are superficial--mere metaphor--then they are probably not very useful. But if business communities and ecosystems are common in fundamental ways, then the parallels are valid and provide potentially powerful insights. Do such fundamental commonalities exist?

Yes, argues Moore--but that’s not to say the two systems are the precisely the same. "People make decisions in business communities, consciously trying to take advantage of their position in the ecosystem," he points out. That doesn't happen in biological ecosystems, so differences are inevitable. Pimm is less equivocal. He argues that business communities and ecologies are two examples of the same thing--complex dynamical systems. For him, the parallels are far from superficial and the ecosystem perspective of business is more than mere metaphor.

If he is right, there is some disconcerting news for business executives. "The first rule of complex adaptive systems is that it is almost impossible to predict who is a friend and who is an enemy," says Pimm. He describes field experiments in which a predator is removed from a community. You might expect its prey, species A, to thrive. But about half the time species A suffers when the predator has gone, because the predator has another prey species, B, which is A's competitor. With its population no longer kept in check by the predator, species B may then push species A to local extinction through being competitively superior. "These effects are only one or two steps into the network," says Pimm. "Go a few more steps and it becomes almost impossible to work out possible combinations of harm and good."

In the business ecosystem, CEOs face the same problem of working out who is a friend and who is an enemy, and how this might change as the environment changes. "It’s not just the competitive interactions that are important in the business ecosystem," says Pimm. "It’s the entire complex of interactions that matter." He also points out that being part of an interconnected network of companies--the business ecosystem--has dangers as well as benefits. The benefits include the opportunity to reap great rewards through the economics of increasing returns. But that same interconnectedness that protects ecosystem members also poses the threat of disaster. "When everything is connected directly or indirectly to everything else, changes in one part of the system may be propagated throughout the system," says Pimm, "and sometimes species may go extinct through no fault of their own."

These aspects of complex systems--unpredictability and the possibility of extinction because of changes in other parts of the system--are distinctly unnerving to CEOs, who are used to at least the illusion of predictability and control. There is a phrase popular among high technology companies, coined by a leading scientist at Xerox's Palo Alto Research Labs, that captures this spirit: "The best way to predict the future is to invent it." This gung ho attitude, says Moore, is doomed to failure. "We know from studying complex systems that prediction in any conventional sense is not possible," he warns. "Not in biological ecology--and not in business and social ecology."

Moore believes there is a change going on in the business world, as a response to the recognition of the ecosystem nature of the new economy. "The effective leaders I meet are the ones who are prepared to let go of the illusion of control," Moore says, "and that's a good thing, because in reality they have no choice."