Complex, lifelike behavior is the result of simple rules unfolding from the bottom up.
It’s how all life on Earth evolved. 3.5 billion years ago, increasing entropy enabled our first multi-celled ancestor to evolve from the primordial soup. To this day, us modern humans continue to benefit from and exploit this law of increasing entropy. Especially businesses.
Entropy Theory explains industry evolution as a story of ever-increasing chaos and suggests that the most successful businesses are those that use the latest technology to wrangle that chaos, until entropic forces unleash the next set of opportunities.
A constant state of chaos and disorder leads some companies to capture value from that chaos and combine it into something usable and valuable for its customers.
He’s absolutely spot on here.
However, we’re going to take this theory a step further and explore how the concept of emergence in the complex system of industry builds upon existing Entropy Theory.
First, let's talk about what emergence is.
Here’s a useful analogy: Emergence is when building blocks at one level in a hierarchy have arranged themselves in such a way that new building blocks become available that were never there before. These building blocks can be anything: cell systems that create organs, individual people that create departments of a business, or blocks in a neighborhood that create a city. The key point is the hierarchy. New building blocks can emerge both vertically and horizontally with each subsequent jump up the hierarchy.
The economy represents the pinnacle of human generated emergence. We start with simple trade - an ear of corn for a bushel of wheat. Then we create a medium of exchange (currency) to facilitate this trade. Many simple transactions, millions of times daily. Next thing we know, we have a global market with basic rules at the core (I mean, we’re just buying and selling stuff to each other!) that create extraordinarily complex behavior that we cannot explain.
At its core, emergence represents the phenomenon of simple mechanisms and rules ultimately producing astoundingly complex behavior, given the right conditions at the right time.
The three key factors where emergence builds upon and further explains Entropy Theory:
Let's see how each of these factors plays out in the chaotic world of business.
Packy describes the businesses that thrive by creating order out of chaos as Entropy Wranglers. Think Spotify organizing millions of songs into one place, or even Craigslist connecting neighbors and enabling us to act on our impulsive desires to get rid of our crap to buy more crap. Converting chaos of the market into order.
Emergence helps us understand how these forces create even more business opportunities. These Entropy Wranglers sit on top of a hierarchy of existing building blocks. Without them, these businesses could never exist.
In his book Complexity: The Emerging Science At the Edge of Order and Chaos, Mitchell Waldrop writes:
“This hierarchical, building-block structure of things is as commonplace as air. It’s so widespread that we never think much about it.”
Spotify has emerged as a successful business because of this hierarchy of underlying building blocks. Commodification of music, cheap distribution, increasing disposable income, drop in computing power. The list can go on and on. These building blocks have enabled a company like Spotify to exist. And the building blocks of today will determine emergent companies tomorrow, whether or not the Wranglers increase or decrease Entropy.
Scientist Stuart Kauffman helps us to further understand the potential emergent businesses of tomorrow with the idea of adjacent possible empty niches. These are niches that exist right now which have not been built on top of yet, but could be with limitless number of possibilities.
Bear with me as we put our evolution hat on to understand this profound idea. Kauffman provides a fun example of a Sunfish that evolved a special swim bladder to help it stay buoyant. This swim bladder ended up creating a niche for bacteria to live in without any natural selective pressures on the bacteria itself. In other words, a building block meant for one purpose (helping a fish stay buoyant) created an opportunity for another organism to thrive and create a whole new set of building blocks for the environment to use.
This is radical emergence in the form of adjacent possible empty niches: we couldn’t have predicted it ahead of time and it changed the course of evolution (new species of bacteria interacting with a new habitat). We see this exact behavior of adjacent possible empty niches in the business world.
A simple example: when the US Navy began using the first electromechanical computers in 1938 aboard submarines, no one could have possibly predicted Facebook, let alone even the concept of cloud computing. But the building block of an information processor created opportunities in the business ecosystem that had never existed before.
COVID-19 has brought us to a tipping point of the mass creation of these adjacent possible empty niches. In Complexity, Waldrop describes this tipping point as the edge of chaos: a phase transition that redefines the environment on top of both increasing and decreasing entropy. Another analogy: water is on the “edge of chaos” when transitioning from liquid to ice. New building blocks, unable to be predicted, that never existed before.
The movement to the edge of chaos provides incredible opportunities for new businesses that couldn’t have possibly existed prior.
Let’s take an example of education on this edge of chaos. Some of the building blocks here are:
These allow for new pockets of educational niches to explode. Homeschooling niches suddenly emerge. It’s a niche that’s always existed, but never taken off because the right building blocks beneath it weren't in place. Now it’s getting venture funding!
If we go back to Entropy Theory, we can predict that new businesses will emerge out of the building blocks of these new, fragmented homeschooling businesses, aggregating demand and creating order out of this new niche.
We can also look at the effects of emergence and Entropy Theory on offices and employment. The days of the static 9-5 and 100 year office building leases are over; in come the WeWork mimics, the distributed workplaces, and the passion economy. Entropy increases. This increasing disorder creates new adjacent possibly empty niches that businesses can fill.
Let’s speculate (because by definition, we can’t know what will happen). If everyone works for themselves or at home, how does transportation work? One hierarchical level above, we could imagine lightweight transportation becoming ubiquitous. People don't need cars to drive 1.5-2 hours to work everyday. Speculating even further, what building blocks could this new transportation system create two levels above?
Waldrop sums up the endless emergent business opportunities and niches better than I can:
“Thus, the economic world has a place for computer programmers, plumbers, steel mills, and pet stores, just as the rain forest has a place for tree sloths and butterflies. Moreover, the very act of filling one niche opens up more niches—for new parasites, for new predators and prey, for new symbiotic partners. So new opportunities are always being created by the system.
And that, in turn, means that it’s essentially meaningless to talk about [an industry] being in equilibrium: the system can never get there. It is always unfolding, always in transition.”
When I worked in finance, Excel was our unsurprising tool of choice. We wouldn’t even entertain the idea of using anything else. Even when it crashed on my Mac or I had to send a file to my boss titled version_dan_463478_i_promise_this_is_final, we never questioned the tool.
Excel is so damn ubiquitous. It’s been used forever. It’s wedged into our business culture, unmoving, orderly, surprisingly free of entropy.
But the tide is shifting against Excel. Eric Vishria, partner at venture fund Benchmark, describes a new era of SaaS company strategy with a “try and toss” model. Software companies have shifted from selling to an entire organization in a top down approach to a bottoms up approach, focusing on smaller teams. It’s easier for small teams to try out a product rather than convincing a whole department. Doesn’t hurt that the cost of shipping software to customers has also plummeted, lowering the barriers to entry for competitors.
These two key building blocks have enabled a whole new breed of companies to flock to this niche to dethrone Excel. Teams can try software like Airtable, Anaplan, Smartsheet, Asana, etc. without having to convince their entire organization. For the first time in decades, knowledge workers have viable options to use instead of Excel.
Bringing this back to emergence and Entropy Theory:
Even in business areas with low entropy, small, seemingly mundane behaviors coupled with a changing environment can produce surprising new businesses. The adjacent possible niche to compete against Excel didn’t exist until these subtler business strategies changed. Once they did, an explosion of new companies came to fill it.
While Entropy Theory explains how certain companies capture value over time by creating order out of chaos, the process of Coevolution helps us understand the powerful forces of emergence capturing value even further behind the scenes.
Coevolution in Nature describes organisms that are ecologically intimate - think predators and prey or hosts and parasites - that influence the other’s evolution. In the business world we see Coevolution manifest through mutual accommodation and rivalry. Sometimes we even see arms races.
The California Gold Rush paints us a classic picture of businesses coevolving. News broke of gold in California in 1848. People set out to make their fortunes (the 49ers). The population of San Francisco grew 25x in less than two years. But the miners themselves didn’t profit all that much; the purveyors of mining supplies, transportation, entertainment, and denim overalls gobbled up the real profits. These businesses coevolved with the Gold Rush - they accommodated the first wave of miners, making it easier for more miners to prospect for gold, thus creating more demand for more services, enabling even more businesses to grow. Mutual accommodation influencing the evolution of both “organisms”. Coevolution at work.
In the modern era we see behemoths like Walmart and Amazon use coevolution as a dominant business strategy. We can observe this through the lens of the online grocery arms race.
I worked for Jet.com’s online grocery delivery business (then part of Walmart, now a relic of startup history!). In early 2017, Walmart launched free 2 day shipping without needing a membership. You can imagine who that pissed off. A few short months later, we found out Amazon acquired Whole Foods for $13.7 billion. That day was somber for the grocery delivery team. Bezos was coming for us.
Fortunately that dark mood passed within hours and we had already set the gears in motion to evolve the business. Our rivalry with Amazon ratcheted up. We lowered the delivery fee; we increased product assortment and unique partnerships and improved the bulky packaging. If Jet (and more so Walmart) didn’t coevolve with this new organism called Whole Foods by Amazon, it’d be dead.
Fast forward to today. This fierce rivalry in the online grocery niche has created an evolution in both businesses that have accounted for Amazon tripling online grocery sales year over year as of Q2, and Walmart seeing an insane 74% growth in online sales in Q1, with online grocery sales accounting for ⅔ of that growth.
Coevolution creates this emergent behavior where both businesses duke it out in a shared niche and improve, evolving in order to stay alive. This competitive behavior creates a rivalry that sustains them both.
Once we see the forces of coevolution in business, we can’t unsee it. Think of:
Understanding emergence and how it functions on top of Entropy Theory can help explain how these new, surprising, unexpected and complex businesses get created, and how it's impossible to even fathom the full extent of what's possible.
The idea of emergence makes me optimistic for the future of business, particularly with respect to innovation in the physical world.
Some ways to use this framework to think of the future with exciting possibilities:
What hierarchical building blocks exist that have yet to be exploited?
If we had all of the building blocks we already need, what environmental conditions do we need to meet to unleash their potential? Can we nudge it over?
How can we create useful regulation that spurs and incentivizes coevolution?
All that said, we still have a lot to learn from Nature herself about harnessing and understanding the mysteries of emergence. If businesses can, we’ve got a damn exciting future ahead of us.
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