August 14, 2020

Making the Most of Our Punctuated Equilibrium

Kevin McDermott
Principal

The current cliché when referring to business operating environments is to call them "ecologies". In a natural ecology, when one species moves out the space it leaves is occupied by a new species. (Sometimes a really new species. Who would have predicted giraffes?)

Not long ago, for example, someone drew our attention to a recent article in The New York Times about the retreat of big retail chains from New York City as a consequence of collapsed demand during the coronavirus crisis. We wondered whether that created opportunities for small businesses to assert themselves.  It made sense to imagine a new, smaller business ecology filling the space left by a larger one grown too clumsy to thrive.

We speak offhandedly about evolutions all the time. Even classical Darwinists never argued that the world gets ever better, only that it changes in response to conditions.  Roughly 50 years ago, evolutionary biologists countered the conventional Darwinist theology of steady, gradual transformation of species with an argument for what they called “punctuated equilibrium”, the idea that species change, die and arise in response to abrupt alterations in their external environment. It is useful to think of 2020’s coronavirus crisis as just such a punctured equilibrium.

Instability in an operating environment can come from multiple directions. The greatest challenge is when instability comes from outside the operating environment, the way the coronavirus did. Looking out three years, five years, firms should be thinking about the meaning of this instability in their operating environments—not merely as a threat but as an opening to something wholly new, maybe even an opportunity. 

Think of newspapers and department stores, for example, and how long they took to understand the Internet as not just a new technology but as a death threat to their business models. Once they finally did the lessons of experience felt suddenly unreliable. Improvements to the old model were a misdirection of energy.

It is almost too easy to imagine similar scenarios as a consequence of machine learning, for instance, which is stealthily upending retail, restaurants, health care, pro sports, finance, pizza delivery, everything. Or think of power companies, which now must account somehow for the countless unknowns of climate change in their strategic planning, imagining wildfires and hurricanes that are not just more frequent but more intense.

Now add a worldwide pandemic.

Most firms are wondering where they will be in three years, four years from today when the coronavirus has done its worst and the enduring consequences for economies are clear.  Even as they struggle to navigate the present companies should be readying their strategic reflexes for a future that will arrive uninvited but arrive just the same.

Central to that future will not only be technologies like machine learning but the consequences of the social and political stresses arising alongside, or maybe because of, the pandemic—and not just in the United States.  A new generation, one with reduced prospects in comparison to its predecessor, has become the majority. It is challenging some of the basic assumptions underlying US society.

These stresses should not be a surprise.  They have been building for a long time. Like a geological fault line that abruptly slips after years of tension they make things fall down.  (Note the shift in metaphors from biology to geology.)  The aftermath will shape markets—and not necessarily for the worse.

In the midst of violent change predictions are risky.  These are too often fear driven. In 1943, for example, a US Senate committee chaired by future-president Harry Truman, predicted that “when war contracts are withdrawn the danger is that the entire edifice will topple over.”  Because the facts were obvious: Millions would come home looking for jobs just at the moment when the red-hot wartime economy would slam on the breaks.  How could there be anything but catastrophe?

That isn’t what happened. The world changed radically, but not for the worse.

It is something to bear that in mind the next time someone confidently predicts the future of your ecological niche. And as any good scenario-planning consultant will tell you, it’s essential to be ready to make the most of change.

 

For a taste of near-term futures we might be facing, have a look at FSG’s post-Covid scenario initiative. These “capsule scenarios” are not in any sense predictions.  They are tools for triggering fresh thinking about operating environments two or three years down the road, as well as for stress-testing existing strategies and tactical plans.

Comments  | 

Very interesting discussion. Reminds me of a consulting project from several years back, when a good number of the Millennial era participants struggled to conceive of the good life as anything other than urban (and preferably Brooklyn). Then Covid happened. We’re now hearing reports of a mass exodus of Millennials from large urban centers. In truth, as you note with your geological metaphor, tensions associated with urban living have been building for years. Part has had to do with unaffordable rents. But it’s lifestage, too. The last wave of Millennials are settling down, starting families, and exploring housing options in the suburbs, exurbs and beyond. Covid has been a grand accelerator of this trend, and broadband is a powerful enabler, as we can now see how it allows a range of occupations to be done reasonably well at home, at least on a part-time basis. It will be fascinating to see how this all plays out over the next five years.
Kevin McDermott
Thank you for this, Peter. The “people are fleeing the cities” story is a good example of why it's important to avoid present-minded perspective on events. To get thinking about 2025 or 2030, for example, not the scary nine months of 2020 which might be prompting fear-based predictions that we will forget in five or ten years. Imagine a firm with a stake in cities. We should be asking, “Where’s your data?” The data from an exhaustive study by Zillow this summer make it pretty clear that there is no great exodus happening, any more than there was after 9/11, the last time “cities-are-dead” headlines were making the rounds. The year-over-year comparison with 2019 is comparatively stable. A more provocative question would be, “If anyone is leaving, who is it? And who is staying? And what will they build in the spaces abandoned by the departed? And what does all that mean for your business?” That’s a conversation I’d love to start. I expect we’ll be having a lot of them in the next two years.
Charles Thomas
Thank you, Kevin. As GDP numbers fall and COVID-19 cases rise, it really is easy to fall into the "future as good or bad" thinking mode. That is both a dangerous and silly dichotomy - because those terms have no planning or preparatory value. However, we do know that some things will endure and some new things will emerge. Now, THAT dichotomy can have some value, if you can nail down what those things might be. It will not come as a surprise that I happen to agree that scenario planning can accomplish much in that regard. In any case, thank you for the clearly-presented reminder of a simple truth.

Thoughts?