THE LAWS OF URBAN GROWTH AND CORPORATE DEATH
One of the highlights of the 2018 SHIFT Business Festival was when the main stage audience was treated to the brilliance of Dr. Geoffrey West. West is a world-renowned theoretical physicist, the foremost authority on urban growth studies, a professor and former president of the Santa Fe Institute and the author of the recent best-selling book “Scale: The Universal Laws of Life and Death in Organisms, Cities and Companies” (or “Skaala” in Finnish – the first language into which this book has been translated!).
West, together with fellow researchers at the Santa Fe Institute, has over the years developed a revolutionary theory that explains the pattern of all growth – literally all. The universal laws of life and death, in organisms biological, urban and corporate alike, is a complex topic, but West claims it is all rather simple: although various forms of life may appear different, they are all made up of very similar structures and conform to the same simple laws, despite differences in scale. Perhaps most remarkably, these laws have also been shown to apply to non-biological systems such as cities, social networks and businesses.
Globally, urban growth at the moment follows superlinear growth, and this will likely continue for decades to come. With such a breathtaking pace, the consequences are not far behind, something that West also expresses concern about. “We live in an exponentially expanding socio-economic universe. The fate of our planet is completely bound by the fate of our cities.” According to West, all of the big problems that humanity is facing – climate change, energy consumption and issues related to health and pollution – are linked to urban growth.
In spite of all these problems, urban growth as a whole is a good thing. Societies benefit from urban growth through economies of scale: costs in energy and other resources per unit decrease as size increases. Or, as West puts it, “It’s good to be big!” As cities grow, they also become more diverse, that is, healthier.
In short, it’s really hard to kill a city – so why do companies die?
Companies, like all organisms, need to grow. When a business stops growing, relative to the GDP, it will wither. According to Dr. West, this is the simple fact, and the real question is: Why do companies stop growing? Not surprisingly, some of the answers reflect patterns we can see at work in natural ecosystems.
According to West, a young company typically has lots of new ideas and a broad product base, as they are not sure what the market response is going to be. Then, due to market forces at work, the company inevitably narrows its focus. “In other words, it goes from a system which has a reasonably high diversity to one with low diversity. And that is one of the things that one learns in biology, in ecology: the resilience of a system is very much interrelated to its diversity.” Companies, however, tend to become continually more focused, not more diverse, because they have to respond to market demands to survive.
Another phenomenon that the new company soon experiences is an increase in bureaucracy. New companies tend to go light on the administration, but as the number of employees increases, so does the red tape. And interestingly, West has found that the size of the administration grows proportionally faster – much faster – than the size of the business. “In some ways, the company becomes the bureaucracy, the bureaucracy becomes the company.”
Finally, as the administration of a business grows, its creative core and substance diminish. “If you look at the amount of money allocated to Research and Development, as reported on companies’ taxes, this is a continuously shrinking proportion”, West says, and continues: “When you couple that – the shrinking allocation to what you could call the creative part of the company – with the growth of the bureaucracy, and the general loss of diversity, it becomes a very fragile system. Meaning that any significant change in the externalities can have a very profound effect on the company.”
And that’s why we may witness a company, even a company which at some point seemed invincible, cease to grow and begin to die. As staggering as an event like this is to its environment – just imagine Google taking a nosedive – according to West, this is a typical development in the life of a company. Closer to home, we have seen it happen to Nokia.
To conclude, West reminds us that a company dying is not always a bad thing: just as life and death form a cycle of continuous improvement in nature, so does the movement of people from ageing structures to new ones promote the evolution of our business ecosystems. “It might be part of the strength of the capitalist system, actually, that we are able to renew, not like the collective itself renewing, but by reassembling. To put it slightly crudely, we don’t care about companies. We care about the people.”
You can listen to Dr. West talk about the life and death of companies on SHIFT Talk podcast