Wednesday, July 16, 2008

Business Natural Selection

When scientists talk about Natural Selection, they refer to the process through which certain heritable (passed on via DNA) characteristics are favored by the environment at a given time, leading to the proliferation of organisms that carry these characteristics.   The organisms are said to be "selected" by the given environmental conditions.  Likewise one can think of similar principles in effect governing the success of a given business under specific economic or business conditions.  Algorithms have been proposed to explain the success or failure of a business based upon certain financial performance metrics.  But one can also think about this at a more general level.  The existence of Business Natural Selection (BNS) can explain quite a few things.  For example, when the latest genius CEO is profiled in the media, one is often struck by the uncanny insightfulness of decision-making that led this individual to success when many others failed.  Time and time again, when poor decisions were made by many, the "genius" makes the right call.  In fact that is because we are scrutinizing the chain of decisions after the fact.  How many business leaders are convinced when they are faced with choices, that their ultimate choice was the wrong one?  Does it make more sense to assume that the majority of business leaders make what they consider to be the best choice for a given situation?  Sometimes that choice is arrived at more confidently than other times, but no one knowingly opts to move in the wrong direction, or to make the wrong decision.  Rather, the best decision is generally thought to be selected and time proves whether that decision was a good one or a bad one.  If one creates a chain of decisions over a given span of time that might have been made by a given business, with thousands if not millions of decisions made, certain ones are favored under a given set of business or economic conditions.  Over time, with millions of businesses counted, a few might have made a series of decisions that ultimately favors them over other businesses for that timespan.  These are the companies that "win" in the marketplace and who thrive despite downturns or other failures within their industry.  This then, may be an explanation for the common observation that the CEO that is profiled today in a prominent periodical is also the one fired next year.  In an environment where Business Natural Selection governs failures and successes, that executive, if not possessing of statistics-beating insight, will quickly regress to the mean and perform no better or worse than others.  In the case of companies that are struggling however, average performance might not sustain a career.  Likewise those leaders with true insight and who have not benefitted from BNS, will exhibit a record of statistics-beating performance year after year.  

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