What Business Cycles Can Teach Us About Evolution

Much has been written about how businesses can learn from nature. But have you ever stopped to consider how evolutionary theorists might learn from business?A decade ago I developed a model that shows how some of the world's leading companies are using an evolutionary approach to stay at the top of their games. It turns out this same model explains not only the evolution of life around us, but also the emergence of that life in the first place.The findings have implications not only for understanding nature and evolution but also for creating sustainable, evolutionary businesses and economies, and perhaps also for understanding what consciousness is.A Cycle of Self-reinforcing Strategic AdvantageA few years ago I was working as Head of Business Planning and Strategic Process/Organisational Change in the largest account of a global IT services company. We were renegotiating a five year multi-continent contract worth several billion dollars and I had been asked to “think outside the box” to see whether I could come up with any unconventional ideas for inclusion in negotiations.I sat down with a pencil and paper and thought generically about what we did for the client, an automotive manufacturer. We understood their business needs, designed computer systems to address those needs, implemented those systems, and then operated them over time. Sometimes we carried out all four steps for the client, sometimes just one. I drew this as a horizontal line on the paper.Then I thought about what parts of the business we did this for. These ranged from activities such as accounting and payroll (where the emphasis was on getting low cost), through warehousing, factories, distribution, to business critical activities such as automotive design, marketing and aftersales.I drew this up the left side of the paper.

What I had drawn was a map of every activity in the client organisation.Each process brought its own combination of cost and contribution to the business, and each was in a continuous cycle of being carried out (operated) and then occasionally redesigned and updated to meet changing priorities.Overall performance was the net result of all these different activities, and this then drove improvement priorities, which led to the contracts we implemented for the client.Mapping Every Activity in an IndustryOf course the same diagram also applies to every other car maker. General Motors, Ford, BMW, Mercedes, and Ferrari all have accounting systems, all pay salaries, run production lines, and do marketing.If we overlaid these maps together we could create a map of the whole industry. But zoomed out to this scale we wouldn't see the individual processes. What we would see instead would be the net results of those processes – the vehicles being sold – so we will need to rethink the vertical axis.Zoomed out to the industry level, horizontal bands now represent a product or service. They range from mass market or standard vehicles (cost focus) to highly differentiated, bespoke or luxury cars (value focus). As before, all are being updated over time in response to the changing market.The new, fractal diagram of the whole industry looks like this:

What determines success in this marketplace is survival of the fittest. The firm that succeeds is the one whose vehicles best fit with the mix of features and cost being sought by each group of customers. (This explains why Ferrari is not competing with Ford, even though they are nominally in the same industry.)More precisely, the firm that succeeds is the one whose vehicles provide the best fit between the firm's capabilities and resources, customer needs, and investor returns (profit).Selective advantage or disadvantage occurs every time a customer makes a buying decision, and depends on the fine tuning and coordination of every internal business process, as well as cooperation with external organisations such as suppliers and distributors.Over time manufacturers not only improve existing models and develop new ones, but also differentiate themselves by creating niches for groups of customers. Luxury marques effectively do this. The Volkswagen Beetle, Mini, and Fiat 500 have also formed distinctive niches.If we imagine zooming into this map it is theoretically possible to create a niche of just one customer.If we zoom out we can understand the evolutionary forces that are driving the industry as a whole.A short case study will illustrate this.Toyota-Lexus: An Escher Cycle Case StudyA hundred years ago Henry Ford invented the production line and revolutionised the automotive industry. By transforming the major process in car manufacturing, and selling “any colour you like so long as it's black”, Ford rapidly became the largest automotive firm in the world.But within 25 years General Motors had transformed other processes, adding more colours and a range of vehicles to suit customers across different stages of their lives. A black Model-T Ford was no longer enough, and from 1931 to 2007 GM remained the world's largest motor company.Today though, the largest world's car firms are Toyota-Lexus and the Volkswagen group. They have achieved this not by improving individual business processes but by connecting them together to create a self-reinforcing cycle of continuous learning and improvement. We can use the above diagram to understand how. And this will give us new insights into how evolution works.Success in the bottom right hand corner of the industry requires the ability to reliably manufacture mass market cars at low cost. The famous Toyota Production System provides this and gives Toyota advantage in this quadrant.Those same production lines can also be used to build Lexuses, using some of the same components. This allows the firm to build Lexus cars with higher quality and lower cost than if Lexus were a stand-alone company, which gives the corporation advantage in the top right corner.This means Lexus sells more cars than it otherwise would, and gets more interactions with the customers who want and are willing to pay for the latest innovations. This brings advantage in the top left quadrant.These innovations (whatever they are) can then be reengineered into mass market Toyotas more easily than designing them from scratch. So strength in the top left also brings advantage in the bottom left.The added features in Toyotas then make them more attractive, so they sell more units, improving the Toyota Production System still further.

What Toyota-Lexus has created is a self-reinforcing cycle of competitive advantage. I call this the Escher Cycle because, like Escher's staircase, it goes up and up forever.The second largest manufacturer, Volkswagen group, does something similar. They own marques ranging from Bentley and Bugatti to Porsche, VW, Seat, and Skoda. These are built on a range of shared platforms (bottom right). And innovations in the luxury marques (top left), for example with engines, are shared into cheaper models.The first priority is for each model to compete in its marketplace. The second is to leverage advantages from one part of the organisation to another.There are six core activities that form the initial sources of competitive advantage. Once firms reach parity on these activities, it is the seventh 'Escher Cycle' that makes the ultimate difference, because it is self-reinforcing.Understanding ProgressThe reason this Escher Cycle is so powerful is because it leverages the forces that drive progress. This is the evolutionary cycle, for example, that brought the automotive industry from the Model-T Ford to the cars of today. It is how progress works.Consider the invention of the lightweight spoked wheel. The first use of this expensive innovation was not for carrying cabbages but for an application that brought massive benefits: war chariots.As the wheelwrights' techniques became commonplace so they could affordably be applied to create lighter, more repairable farm carts.Farmers could then travel further to market, so markets grew, and with them cities.Larger cities brought greater wealth and new problems to solve: piped water, sanitation, the need for banks to store the wealth in. That led to the invention of new methods of warfare, either to defend or attack the wealth that had been accumulated, and the cycle began again.

What we see here is the same Escher Cycle pattern at a different scale. At the same time these innovations in products and services were accompanied by changes to culture and attitudes (eg the Industrial Revolution), and the formation of niches as cities and nations chose to specialise in different areas such as pottery, glass, cloth, warfare, or trade. Each decision raised the bar for quality and cost in that industry. And the groups traded with each other in a global-scale Escher Cycle that is still operating and evolving today.Next we shall apply this evolutionary framework to the evolution of natural organisms.A New Paradigm for EvolutionThere are several parallels between this way of looking at business and life.First, living organisms (like businesses) operate in an environment made up of other similar organisms, taking inputs from some and creating outputs for others.A species, genus or family might be considered equivalent to an industry. And the total ecosystem corresponds to the total economy. The same fractal pattern repeats at different scales.Like a business, each organism contains a variety of processes. As in the first diagram above, some (like photosynthesis or digestion) maintain the organism. Others (like eyesight and opposable thumbs) determine its ability to succeed in its environment.As with a company, evolutionary selection operates at multiple levels simultaneously. The ability to digest food (or process transactions) might not differentiate me. But the inability to do so will definitely kill any organism or business. (And what is 'housekeeping' for one organism (or business) may be cutting edge for another.)Finally, as with a business, each species is constantly undergoing change in every part of its genome, all of its processes.We can now draw a map of all life on Earth.The vertical axis now represents organisms ranging from less differentiated to more differentiated: from prokaryotes (lacking a membrane-bound nucleus) to eukaryotes (with a membrane-bound structure). The horizontal axis now indicates the organisms reproducing as Darwin described, with random variation, and then interacting with the world. (How that reproduction works varies by species: simple replication for prokaryotes, exchange and recombination of genetic material in eukaryotes.)

Like the Ford Motor Company of 1908, the Last Universal Common Ancestor (LUCA) of three billion years ago has evolved into the more complex forms we see all around us, through repeated interaction with its environment and subsequent alteration of internal processes. The fittest adaptations survived.Darwin's theory of natural selection predicted evolution through a combination of variation and selection. He did not specify how this variation happened, but we are almost all now familiar with the idea of genes and random mutation at the time of reproduction.But we also know that this is not the full story. What evolves is not a set of genes, nor a static phenotype, but a developmental system, embedded in an even broader web of interactions with the 'environment' – the famous "tangled bank" of hedgerow species that Darwin invokes in the closing paragraph of The Origin of Species.The Escher Cycle shows that system.Think back to the time of early life on Earth. The Last Universal Common Ancestor was a global mega-organism that filled the planet's oceans. Cells exchanged useful parts with each other without competition.Reproduction with random variation created new genetic forms and expressed them in the environment (Arrow 1). Each variation experienced greater or lesser fitness, was shared, and the cycle repeated.Then at some point, about 2.9 billion years ago, the LUCA evolved into the three domains of life, the ancestors of all living things on Earth today (Arrow 2). These more complex forms each continued to evolve (Arrow 1) and to diverge (Arrow 2).As with the Toyota-Lexus case, strength in the bottom right corner provided both the components and the production line needed to produce more complex organisms in the top right. For example, we know that a banana has 50% of the same genes as a human. The building blocks of RNA and DNA were vital. The evolutionary building block of mitochondria allowed multi-celled organisms to form. And ninety percent of the cells in your body are non-human, helping to keep you alive.Ultimately the 'production line' on which all new life is built is the sum total of all life forms that have evolved so far. We call this 'the environment'. But in reality it is the 75 billion tons of almost nine million niches (species) that the original LUCA has so far evolved into. It is still one large, living entity, still exchanging useful parts around the Escher Cycle. Many of the parts have simply become more differentiated than they were three billion years ago. And in our standard existing way of understanding evolution we have focused on those parts and forgotten to see the whole.The third arrow in our diagram is epigenetic change. Here a parent's experiences, in the form of epigenetic tags, can be passed to future generations.And we also know that genes can jump between species: genes from genetically modified crops, for example, have been found in bacteria in the stomachs of bees. This is Arrow 4.Ultimately what we see is that the original LUCA is still exchanging useful material between different cells – it is just that those cells have now evolved into more complex, specialised forms, rather than the leaky cell membranes of four billion years ago. Ultimately though, the total ecosystem is still exchanging useful parts just as it did then. And all parts are continuing to co-evolve: just as they did when differentiation was low, and just as the different businesses in an economy also loosely co-evolve.

One implication of this diagram that I do not yet know how to resolve is whether it implies a role for mind or consciousness. In businesses the steps to understand and design new processes clearly involve conscious choice. We know that emotional stress in humans can lead to epigenetic changes. And Jablonka and Lamb have recently pointed out symbolic inheritance in humans, and the rabbit mothers whose preference for juniper berries is transmitted to their offspring. Does mind have a role to play here?A Final Step: The Emergence of LifeNew ideas on the origins of life have recently been put forward by Jeremy England (and earlier by Karo Michaelian). In brief, England has shown that the second law of thermodynamics means that clumps of atoms surrounded by a bath of other atoms (like the atmosphere or the ocean) will tend over time to arrange themselves into forms that resonate more with the sources of work energy in their environments.In addition, Michael Brenner's recent work at Harvard shows how inorganic microstructures self-replicate. And England has derived a formula that defines a lower bound for the amount of heat that is produced during that self-replication.Self-organisation and self-replication: these are the two branches of the Escher Cycle. If we imagine the oceans prior to the formation of the LUCA filled with a 'soup' of atoms and molecules:

• Energy from the sun (or other source) leads atoms to structure themselves together in new groups.
• These self-replicate by triggering nearby atoms in the soup to form similar groups. (Presumably this involves some kind of field(s) that weakly and then strongly influence atoms to form new bonds.)
• The newly-formed molecules repeat the process by:
• 'competing' with each other to find the most-fit forms. (When similar molecules X and Y meet, does X influence Y to become like X, or does Y influence X to become like Y?)
• combining into more complex forms under the continued influence of the energy source.

Just as with businesses, the forms that survive do not necessarily offer the most highly-developed functionality, but rather the best balance of functionality and energy (cost), for a given available pre-existing set of processes and resources. (In business the most successful services are those that generate the highest profit from a given set of customers and business methods.) Nature, too, runs an energy-based profit and loss account.Conclusions and ImplicationsWhat we have seen is a repeating, nested, fractal pattern, inherently chaotic and yet at the same time deeply directional, that shows how the first life emerged to form the LUCA, how the LUCA evolved to form all life on Earth today, how the use of tools (to solve problems) led human societies to evolve, and how corporations are still evolving new solutions to those problems today (and finding global-scale competitive advantage by copying the pattern of the Escher Cycle).What does all this mean?For me personally, the most important implications are about what it takes to run a sustainable business and economy. It's not just about switching to renewable energy: it's about learning to run our businesses and other organisations as living, adaptive organisms that are connected into the world around us. The Escher Cycle provides part of the story as to how to achieve that.A second implication is that by clearly identifying and separating-out the reproduction stage we see life for the fully integrated dynamic process of change that it is. Rather than separate entities descended from a common ancestor, species are actually more distinct parts of a still-integrated whole, which can continue to evolve towards and away from each other. We regain the view of the forest, as well as the trees.This leads to the realisation that the Last Universal Common Ancestor still exists, but it has evolved into more varied and differentiated forms than it had three billion years ago. (Some people call this new form Gaia.) When Galileo discovered the four moons of Jupiter he showed that neither the Earth nor humankind was the centre of the universe. Similarly we can now see ourselves as just one part of the current, evolving, manifestation of the LUCA/Gaia.Finally two further potential implications.It seems likely to me that imagining a living organism as roughly equivalent to a business, a collection of evolving processes some of which are more critical than others, may bring new insights to understanding how organisms work. As a non-biologist I can't make an assessment, but please do contact me if you have views on this.And finally, given that the 'understand' and 'design' stages of the business manifestation of the Escher Cycle involve the deliberate use of mind and consciousness, the model implies by similarity the presence of something analogous in the evolution of even the smallest molecules. It may provide support for the view, already held by some physicists, that consciousness is an inherent property of all matter. And the work of Masaru Emoto, although outside the mainstream, already implies some connection here, through his studies of the effects of human consciousness on water and the formation of ice crystals. And the Escher Cycle may provide a mechanism by which low-level consciousness or sentience can be seen as an emergent phenomenon, explaining the sentience found in plants and slime moulds and the consciousness of the range of animals defined in the Cambridge Declaration.Whatever these specifics, it is surely remarkable that a single model should brings cohesion to all these different complex patterns, embedding them in the networked ecosystems and evolutionary framework of the multi-layered Escher Cycle. Please do contact me to let me know your views.