How companies disappear from the business landscape

One of the most important and unknown law is Ashby’s law: “The larger the variety of actions available to a control system, the larger the variety of perturbations it is able to compensate”. Or in plain English; if an organization wants to be on top of a complex environment, it needs to be more complex than the environment the organization tries to control. Complexity is a direct outcome of the number of elements that create a system and the interactions between the system’s parts.

My favorite example is from the automotive industry. During the second industrial industry, Ford influence by Fredrick Taylor creates a management system that based on few making decisions that impact the entire company. To beat this system General Motors (GM) increased complexity by enabling each division to have their autonomy, that allows GM to become the biggest car manufacturer. The next disruptor was Toyota that used autonomy for each employee on the production line.

Increasing system complexity is coming in a bundle with increasing system entropy. To reduce entropy, the organization need more energy (resources) to restore order. The paradox is that as complexity increased, entropy increased, which demand more resources to restore order. The problem is that resources are limited, so in some point of time the amount of resource needed to restore order is not available. Once there aren’t any available resources to restore order the company starts another cycle that increases chaos until the chaos will take the company apart.

The other alternative (which is the most common one) is that the company will not increase the internal complexity to deal with the increased complexity in the business environment. This scenario is typical when the external complexity also negatively impacts the company’s revenues. This scenario will bring the company into equilibrium and then slowly to death. Most of the companies that disappeared from the business landscape are an example of this scenario.

To find the balance between complexity, entropy, order, and resources is an art that takes time to develop and then master. It is an outcome of a long process of trial and error that is bold enough to move the company needle, but not too bold to the degree that one of the above scenarios will add a company to the list of the failed company (a longer list than the companies that succeed).

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