There is no perpetuum mobile in business. Companies that aren’t constantly supplied with energy are doomed to marginalisation, and in the long run, disappearance and liquidation. The energy required to sustain the vitality of a business can be provided in the form of capital, technology, and the know-how of managers.
The changes taking place in companies and the processes that result in one company having spectacular success while another fails have always been intriguing to the author. How is it that new industries are emerging while existing and seemingly stable companies become worthless overnight? Why do some brands master the global market at a surprising pace, while other well-thought-out and profitable businesses limit themselves only to the local market? It’s surprising that this doesn’t always have much to do with the development of new technologies, as is commonly believed.
The rise of huge giants
Examples of companies such as Starbucks, Zara, LVMH, IKEA and Virgin show that building a global corporation almost from scratch in sectors unrelated to new technologies is doable in one generation. This phenomenon can be explained in many ways: the charismatic attitude of leaders (such as Steve Jobs) or the discovery of great new markets the existence of which no one had ever suspected. Finally, there are companies the creation and development of which are enabled by new technology; however, in such a situation, many similar entities usually appear, and few end up winning.
In just 14 years of his renewed leadership (1997-2011) at Apple, Steve Jobs was able to transform a declining company that was unable to cope with Microsoft’s competition and PC manufacturers and was in danger of collapse or a takeover into an enterprise with the highest market quality in the world, with capitalisation exceeding USD 500 billion at the beginning of 2012. No one in the history of global business has ever even come close to this achievement.
The new-technologies sector
The sector of new technologies, which was almost non-existent in 1970, just 20 years later became the driving force of the economic development of the United States and the basis of successful rivalry with China. During this time, hundreds of thousands of companies and jobs related to new technologies were created in the United States alone, but most disappeared during the first three years of operations, or even sooner.
Forecasting future events and market trends
Another key issue of modern economics and management sciences is whether it’s possible to forecast future economic events and market trends. How is it possible that during the next technological revolution, fantastic econometric models and analytical processes, the 2008 global financial crisis was not foreseen? Are economic sciences exact or social? The modern world is changing so rapidly that the current economic paradigms are ceasing to apply, because reality proves to be more complicated and unstable than it first seemed. Earlier, it was necessary to wait decades or even centuries for the appearance of significant business innovation, while today, it’s a matter of days or weeks rather than years.
When we compare the 30-year period of building a company with 6,000 years of human activity (from early settlement and craftsmanship to modern times), it turns out that we need 30/6000 = 0.5% of this period to dominate a given business sector on a global scale. This roughly corresponds to the period of three million years of evolution on Earth, and from this perspective, although we’re still talking about an extremely rapid process, it has a reference in nature. Approximately 7-8 million years ago, man’s ancestor appeared (at the end of the Tertiary), and the oldest homo sapiens remains found are less than two million years old. From the perspective of the history of evolution on our planet, this short period was enough for humanity to rule over the whole Earth.
So, if you apply a similar measure to the development of business and life on Earth, it turns out that proportionally the rate of change is comparable, although as we observe the appearance of giants such as Google or Microsoft, we have the impression that they progressed rapidly. On the other hand, there are traditional businesses, such as banking, shipbuilding and mining, which have been around for hundreds of years and are doing well despite periodic disturbances. It’s similar in the animal world – sharks are doing very well, and have existed almost unchanged for 160 million years.
The natural environment and the economy – similar evolutionary processes
If we start analysing the natural and economic environments more deeply, we’ll be amazed that there are many similar evolutionary and adaptation processes that determine the development and survival of both specific species of flora and fauna as well as specific companies and entire business sectors. The similarities are so striking that it can be presumed that the language of business has borrowed many terms and concepts from the field of evolution, including the functioning of ecosystems. For example, a company’s life cycle, its adaptation to prevailing external conditions (to the market), the evolution of companies, the emergence and disappearance of entire sectors of industry and services, and analysts and experts now analyse the company’s DNA.
The above analogies make us wonder if companies, similar to living organisms, are subject to the laws of evolution: are they adapting to environmental conditions, is the best-adapted company winning, and is the purpose of living organisms to transfer genes while the purpose of the company is to maximise the likelihood of achieving positive cash-flow (this is often automatically related to showing profit, but not always).
The theory of evolution and changes in a company
Many elements of Darwin and Wallace’s theory of evolution can be simply referred to as an analysis of changes in a company. In the author’s opinion, the principle of free selection is a key law determining the survival of a given company on the market, or its disappearance. On the other hand, businesses are subject to processes similar to both kin selection (Darwin’s classical theory) and the phenomenon of group selection outlined by the American sociologist Edward O. Wilson. The principle of free selection in nature is fundamentally related to the second law of thermodynamics – the concept of entropy; this principle of free selection is the same in the business environment in relation to the same laws of physics.
Capital, technologies and know-how as the energy of companies
There is no perpetuum mobile in business. Companies that aren’t constantly supplied with energy are doomed to marginalisation, and in the long run, disappearance and liquidation. The energy required to sustain the vitality of a business can be provided in the form of capital, technology, and the know-how of managers. The form of incoming energy is not as important as the very fact that it is constantly coming in. The hypothesis about the similarities between the development and competition of living organisms and economic entities can be developed in the form of a presentation of the similarities between the way decisions are made in the case of an individual person and a company. According to the research of D. Kahneman and D. Goleman, in addition to analytical thinking, fast thinking (subconscious thinking) is equally important, while emotional intelligence (EQ) is at least as important, if not more important than logical and mathematical intelligence (IQ).
Classical economic theories and market realities
Classical economic theories are often inadequate at describing existing economic phenomena. The classical law of supply and demand doesn’t work when emotions begin to be expressed, and the invisible hand of the free market and the lack of any regulations can sometimes lead to catastrophe, which is what the world experienced during the 2008 crisis. We see the effects of excessive state interventionism in the extreme experiments of communist economies. Therefore, on the one hand, we have an unreliable free market system, which according to the assumptions should always be effective, and on the other hand, there are attempts to control the market process from the central level, resulting in a smaller or larger (most common) disaster. This situation led the author in the footsteps of many modern researchers to not only focus on logical and mathematical intelligence (IQ), which is responsible for the rationalism of markets, but to also recognise the role of emotional intelligence, which results in many of our decisions.
Behavioural and evolutionary economics
Choices and investments pursued based on emotions aren’t always rational and often result in market anomalies. Before the technological and internet revolution, getting to a state of balance, due to the mild effects of wrong decisions and the slower pace of transactions, was relatively easy. Today, we see an unprecedented scale of operations often carried out in split seconds. The market has never faced such a challenge in all of history. There is no time to recognise the effects of a decision and possible correction or the elimination of the effects, because competition requires immediate actions to be taken.
Hence the need to study the relationship between emotional intelligence and logical and mathematical intelligence in the light of business decisions seems obvious. Behavioural economics deals with this. On the other hand, evolutionary economics studies market changes and the effectiveness of different strategies in the context of evolutionary theory. Although both approaches – evolutionary economics and behavioural economics – draw their inspiration from the nature and theory of evolution, they largely function in parallel and appear to be independent of each other. Behavioural economics is the analysis of the investment decisions of one person; evolutionary economics is the analysis of changes in entire markets.
The DNA of a Company
This paper attempts to create a common denominator for both of these research approaches. Building a company’s DNA model based on the principle of similarity to the DNA of living organisms allowed us to draw on the theory of evolution and game theory. The analogies are surprising and very inspiring. Focusing on the evolutionary changes that take place in companies and corporations, the author attempts to bridge the gap between research on the choices of a single person and the evolution of entire markets. This is one of the two main hypotheses of the paper: as in the case of humans, we are dealing with logical and analytical intelligence as well as emotional intelligence, and often the latter is responsible for the choices we make; it is similar at the corporate level, as corporations are also characterised by emotional intelligence as well as logical and analytical intelligence. Efforts were made to demonstrate that under the influence of emotional intelligence (described and defined by the author of the paper), companies make many decisions without proper analysis and caution. Some of them are brilliant while others are unreasonable and lead to losses.
The DNA Model of a Company – a theoretical and practical study of changes
This monograph ‘The DNA Model of a Company’ in fact links behavioural economics (explaining the reasons for the decisions of individuals) and evolutionary economics (examining market and strategy changes from a Darwinian point of view). Building the company’s DNA model and genotype presented in this paper allows a theoretical and practical study of the changes taking place in the company using well-known methods of analysing the mutation of live cell genes. Mutations of living organisms can be accidental or forced. Companies are similar, and many changes taking place inside a company are the result of the emotions and subconsciousness of its managers. Therefore, a company’s evolution, which is then an element of the evolution of the entire market, shows a very strong correlation with the decisions of individuals at the business unit level, and this falls within the domain of behavioural economics.
Modification of the main theory of Milton Friedman
The second important part of this paper is an attempt to modify the main theory of Milton Friedman on market efficiency. Due to the specificity of the structure of the human brain, some business decisions are inevitably irrational. In the history of economics, when the effects of these irrational decisions were limited, natural forces forcing market efficiency had time to make adjustments and the economy had the time to return to efficiency. The problem started with globalisation and the development of new technologies. A defective product or service is currently implemented on a global scale, and the effects of such implementation are also global. Unrelenting and ever-increasing competition means that entrepreneurs don’t have time for pilot programmes.
In this paper, the author gives examples of many such implementations. Great economics theoreticians did not anticipate the effects of globalisation, which, except for reducing production costs and eliminating deprivation and poverty in many regions of the world, causes crises on an unprecedented scale much easier and faster than ever before. Therefore, at present, theory and practice of economic sciences should focus on launching new products on a global scale, constructing better forecasting methods, and introducing regulations minimising the risk of market destabilisation in the rapidly developing world of economics.
The DNA Model of a Company – finance, know-how, profitability and acquired market share are not enough. Soft elements are equally important, and these include the level of staff, motivation, atmosphere and interpersonal relations at work.
The main purpose of this monograph – The DNA Model of a Company – is to present the dual nature of companies, and to demonstrate that the smooth functioning and development of a company needs more than just a solid financial basis, know-how, profitability and acquired market share. Soft elements are equally important, and these include the level of staff, motivation, atmosphere and interpersonal relations at work. Of course, there’s nothing insightful about this, since it’s long been known that the role of management and staff is key; however, in this paper, the author would like to closely link the issues of the hard elements of management related to the company (balance sheet, profit and loss account, cash flow, internal and external regulations related to the business) and soft skills, which are determined by the human factor.
Therefore, after analysing the literature on the achievements of evolutionary and behavioural economics, the monograph will build a company DNA model that allows the said hard and soft elements to be captured in a way that is distinctive of thinking from the perspective of the evolutionary approach. The built model is the result of many years of observation of financial markets and the behaviour of corporations. The paper presents the results of research to supplement the DNA model with appropriate morphological features conducted in this area, as well as to validate it in practice. In addition, there are many summarised case studies that allow a more complete explanation of the concept of the construction and functioning of the built model.
The paper uses inductive reasoning, which is typical in the social sciences, but also deductive reasoning used in economics. The monograph – The DNA Model of a Company – also uses an approach based on the principles of inference by analogy.
The company functions similarly to the human mind
The company functions similarly to the human mind, which sees decisions made under the influence of emotions and intuition, as well as under the influence of a complex analysis of available information as equally important. The paper puts forward the hypothesis that all elements of a company are constantly changing, striving to best adapt to changing external conditions. The nature of these changes is very similar to the changes that occur at the genetic level in every living organism in the process of evolution.
The company DNA model was built for the purpose of studying this process. The model, similarly to the real DNA of living organisms, has two strands (chains) of genes. In the presented model, one chain is responsible for all information about the company that can be described. In particular, these will be business, financial and legal data. The company’s second DNA chain describes each employee, their skills and qualifications, but also the relationships between the employees. The model assumes that each closed set of information about the company (for example, the profit and loss account) corresponds to a real DNA gene. Similarly, each employee and each relationship in the second chain is also a separate gene. Such model company genes are constantly mutating, contributing to increasing the company’s competitiveness, or if they are disadvantageous mutations, to the disappearance and liquidation of the company.
The first three chapters of the monograph – The Company DNA Model – are the theoretical foundation of the considerations contained in further parts of the paper. Chapter one contains a brief outline of classical economic theories. The second chapter resembles the basic theories and concepts associated with Charles Darwin’s theory of evolution. The third chapter introduces contemporary scientific achievements related to evolutionary economics, behavioural economics and behavioural finance; it also contains a critical discussion of their strengths and weaknesses.
Lack of consistency – the main problem of modern economic theories
The main problem of modern economic theories is a lack of consistency. For example, on the one hand, there is a well-recognised and defined mechanism of irrational decisions made by an individual under the influence of emotions or incomplete access to information – these issues fall within the realm of behavioural economics. On the other hand, we immediately move this to the level of market trends and choices, showing the evolution of strategies and decision-making processes, which is the domain of evolutionary economics, which bases its research on analogies with the process of evolution described by Darwin. A very important element is lost along the way – the company. Although some researchers of evolutionary economics take on the topic of mechanisms of natural selection at the level of a single company or industry, these works don’t include the issue of the existence of collective awareness and emotional intelligence of the entire company, or of the impact of emotions on intuitive business decisions of entire management teams. Therefore, despite clear references to nature in both behavioural and evolutionary economics, there is a lack of a link between them.
The above problems become even more valid, because the effectiveness of the developed forecasting methods seems to be decreasing. This is because they are, to a greater or lesser extent, always burdened with the perspective of the past, and are the result of the extrapolation of historical trends. This places a huge question mark on the quality of econometric models and their adequacy in describing contemporary economic phenomena and processes. Due to the scale of the last financial crisis (2008), the effects of which we still have not been able to cope with, and that the Great Depression of the 1930s was ended by World War II, these questions take on a dramatic dimension.
Nature and evolutionary processes as an inspiration for forecasting and managing the economy
So, where can we search for the answer to the question about the correct methods of forecasting and managing the economy and specific companies? Nature and evolutionary processes can be an inspiration. Ultimately, humans are also a part, and all human activities, including economic activity, are part of nature. Therefore, one may consider the hypothesis that running a business is also perhaps subject to similar laws that describe the functioning of the ecosystem and its components. The idea of adapting some laws of evolution and vocabulary in the field of biology is not new. In colloquial language, phrases such as ‘company DNA’ or the need to adapt to changing conditions are common, and behavioural economics seeks to explain some of our investment decisions with emotions.
Proprietary DNA Model of a Company
The proprietary company DNA model presented in chapter four shows how individual DNA chains change over time, creating new mutations that can be advantageous or disadvantageous for continued survival. Having such a genetic model of the company, one can start a discussion on how Darwin’s theory adapted to business needs functions in a market environment. The discussion on the evolutionary advantage of large corporations over small businesses seems interesting in this context. Using the presented company DNA model, it’s easier to understand why the principle of market stability and rationality doesn’t always work, and irrationalism of investment decisions is a rather common rule, not an exception. This monograph attempts to bridge this gap and present the possibilities of using selected elements of evolutionary theory in building a model of the company’s functioning.
Further on, the paper introduces analogies regarding the selection of strategies for fighting for survival in the animal kingdom and the economic environment. The number of common points is surprising. It’s amazing that the behavioural mechanisms created over billions of years of evolution also apply to business, and attempts to ignore them end in inevitable disaster. The natural world has always known and applied the principle of risk diversification (the principle of bet-hedging), symbiosis in symbolism, beneficial altruism or adaptation of the population size to the size of the market (in nature: to the amount of potential food in a given area).
Chapter five outlines examples of positive and negative mutations that increase or decrease the chances of survival, in accordance with the principle of free selection in an environment of free market competition. In this way, the possibilities of using the proposed company DNA model in corporate management are highlighted. If wanting to increase its scale of operations, every company must change its DNA, and sooner or later it will change into a corporation, or it won’t survive.
Game theory is necessary to understand the mechanisms of evolution in economics and the theories of management sciences
As mentioned above, when looking at the mechanisms of evolution in economics and the theories of management sciences, one cannot overlook the achievements of game theory. The staggering popularity of applying game theory in both economics and evolutionary theory may be surprising, but in essence, it’s deductive proof of ongoing processes. Many studies confirm that some animals behaviours can at first glance be directly explained as living organisms applying game theory in practice(!). In this way they simply, in line with the natural selection process, increase their chances of survival. Based on game theory, you can not only study the behaviour of various animals, which is extremely interesting from our point of view, but through analogies create strategies for companies and entire business industries.
Using what nature has created and tested in practice can be very valuable. The widely known and commented blue ocean strategy presented in 2005 by W. Ch. Kim and R. Mauborgne is nothing more than letting a predator loose in a new area where it has no natural enemies and has abundant food – it will certainly reproduce very well. It’s similar in business – the blue ocean strategy is very effective. The introduction of game theory and examples of existing identical decision-making strategies in nature and the business environment (discussed from the point of view of game theory) are discussed in chapter six. The examples of applications of game theory and analogies from the world of nature outlined confirm the evolutionary nature of all companies.
The short (six-chapter) monograph contains a proprietary DNA model that is a new tool in studying the course, direction and effects of progressive mutations of the individual elements of a company. Due to the scale of even the last financial crisis, the research direction addressed in this monograph may find extensive application in works aimed at increasing corporate stability.