The trouble that some 20th century business models are having with new, 21st century paradigms have some parallels with the rise and fall of great societies. Complexity may be the cause of its own downfall because it is affected by the law of diminishing returns. But this observation makes some implicit assumptions that may not hold true for long. What if the new paradigms had some form of immunity to this historic law?
Joseph Tainter’s book The Collapse of Complex Societies, provides an interesting explanation for the core mechanism behind the fall of complex societies, and, by extension, complex business models, as summarized by Clay Shirky in a recent blog post:
“A group of people, through a combination of social organization and environmental luck, finds itself with a surplus of resources. Managing this surplus makes society more complex—agriculture rewards mathematical skill, granaries require new forms of construction, and so on… Early on, the marginal value of this complexity is positive—each additional bit of complexity more than pays for itself in improved output—but over time, the law of diminishing returns reduces the marginal value, until it disappears completely. At this point, any additional complexity is pure cost… When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.”Brutal End
The conclusion that reform or transformation of complex business models can occur only through sudden simplification seems to describe what is happening to old school (ie. XXth century) companies as they confront the challenges of Web 2.0. But the apparent inevitability of the process it based on some unspoken assumptions:
Assumption (1): Business models are constantly built-up in complexity; that is how they have delivered rising profits in the past.
Assumption (2): Business models secrete the need to be defended, always beyond their reasonable lifespan – their executives are only human after all.
But do these assumptions really hold?
The core of Sun Tzi still applies
Indeed, there is the possibility that the Web 2.0 phenomenons who compete so differently and cheaply with established business models with high cost structures may carry within themselves the ability to regenerate in a way that avoids the Fall through sudden simplification that seems to threaten so many older models.
Old Chinese military wisdom teaches us that if our plans have no discernible form they cannot be detected and no preparations can be made against them. For the first time in history, it may be possible to devise value-creating business models and the structures that implement them, efficiently, quickly, so much so that they can also be disbanded once they have ceased to deliver their value, precisely because the next business model idea to generate value can be implemented so swiftly.
The Web offers the opportunity to generate value through formless, unstructured networks of contributors who are not part of fixed organizations; who constantly connect, work for and learn from a variety of environments. Although a snapshot of the new arrangements that underpin value creation in this environments may reveal considerable complexity, they are not beset by the rigidity that is the source of so much anguish for companies such as old-school Media corps (TV, Print..). Flexibility is built into the heart of the new system. Flexibility through unprecedented connectivity and empowerment of participants makes new business models, but also makes scrapping them extraordinarily easy. The need to defend which is a key motivation for increasingly fruitless complexity is scrapped.
Which brings us to the parallel between Joseph Tainter’s book and the fate of complex business business models. When he wrote the book, he could not imagine that, one day, a worldwide network would produce a frictionless way for people to associate, build, disperse and regroup that would eliminate much of the need for many high-cost value-creation structures. As a whole, the system should be more resilient. It encourages business people to think in terms of series of business models that constantly explore new profit niches, rather than established structures than necessarily become unsustainable. Immortality through permanent mutation – in a business sense -may be within reach for the first time.