Darwin at Work: Survival of the Fittest Companies

Just a few days after my wife and I returned from our vacation in the Galapagos Islands, Wall Street Journal "taste" columnist Eric Felten published a fascinating article about "The Impossible Project," a last-ditch effort by Austrian entrepreneur Florian Kaps to save an endangered commercial species, the Polaroid instant camera.

The last Polaroid film factory, in a suburb of Amsterdam, was about to be torn down, with demolition delayed by the sour economy. Aware that many Polaroid enthusiasts still exist around the world, especially in the arts communities, Kaps stepped in to save the old plant. He executed an eleventh-hour lease and hired Andre Bosman, the factory's former chief engineer, to recreate the magic film and save it from extinction.

For the time being, at least, the project is moving forward. The first batch of "sepia-tinted black-and-white" film went on sale in March. Color film is promised by summer. Kaps' intervention—what we typically refer to as "conservation" when plants and animals are involved—had saved an endangered species.

It's not often we think of companies or products as species, but perhaps we should. It might help us to understand more clearly both product and company life cycles—how some adapt and change while others go the way of the buggy whip (which, for the record, are still made by U.S. companies such as Westfield Whip Manufacturing in Westfield, Mass.).

the origin of tropical penguins

Before I discuss companies as species, however, let me introduce you to Eileen, my wife. Eileen is a molecular geneticist who specializes in endangered plant species and works at the Chicago Botanic Garden. Her most recent paper (with co-authors Joyce Maschinski and Jeremie Fant) was published in February under the title "Using genetic and morphological analysis to distinguish endangered taxa from their hybrids…."

Eileen had long wanted to visit the Galapagos, a generally inhospitable volcanic archipelago more than 700 miles off the coast of Ecuador. Because of the islands' remoteness, animals and plants had great difficulty reaching the islands. When they did, their first challenge was to survive. Those able to do so were those best suited to the environment. Centuries of this "natural selection" resulted in unique varieties of flora and fauna. For example, the only species of tropical penguins in the world had originated in the Antarctic about 7,000 miles away; those best able to adapt to tropical heat were the ones that survived.

Interest in the Galapagos goes back some two centuries—at least to 1831, when a young, unknown medical scholar named Charles Darwin was chosen by British Capt. Robert Fitzroy to serve as his traveling companion and naturalist on the HMS Beagle's planned five-year voyage around the world. The journey was chronicled by Darwin in an 1839 book, Voyage of the Beagle. Darwin published a far more important text two decades later: On the Origin of Species. In this landmark book based on Darwin's observations of the unusual, and in some cases exotic, species native to the Galapagos, various concepts that have been the bedrocks of evolutionary biology for the past 150 years were developed: natural selection, adaptation, evolutionary change, and so forth. These concepts explain how things evolve differently over time.

Why just biology? Don't the same laws apply to commerce? Don't products, companies, and societies also have to adapt and change—or run the risk of being subsumed by others—even of perishing?

natural selection in the marketplace

Many years ago the late Bruce Henderson, founder of the Boston Consulting Group (where I work), observed that "Darwin is a better guide to competition than economists." When you consider all the once-popular products and brands and once-mighty companies that no longer exist (such as Fokker, for a time the world's largest aircraft manufacturer) and companies that are giants today but were mere embryos a decade or two ago, you realize that many laws of nature also apply to business. To be successful in business, we need to understand these concepts.

For example:

Natural selection. Natural selection, in the shorthand of popular culture and mass media, often is referred to as "survival of the fittest." What it really means is that plants and animals with certain genetic traits—webbed feet, thick fur, drought resistance—will do better in certain environments than those lacking those traits. Over time, the species with these specific traits will dominate these environments, while others will struggle or disappear. It is the purest form of competition.

The same applies to business. In today's global marketplace, the competitive advantage often belongs to companies with certain characteristics: the manufacturer with the lowest cost of production, the big-box retailer with the best supply chain, the company with the biggest nest egg or the most nimble management. During tough times in particular, any one or combination of such traits can be decisive. Stress, such as drought for animals and plants or recession in businesses, creates periods of significant change. Only the strongest survive.

Artificial selection. Artificial selection means that somebody other than Mother Nature is breeding certain characteristics into a species. Think of how wolves have been bred by humans to create multiple varieties of dogs, from the wolf-like Alaskan malamute to the Chihuahua and Great Dane. The late Nobel Peace Prize-winning agronomist, Norman Borlaugh, used the same techniques after World War II to produce a new strain of high-yield, disease-resistant wheat that is credited with eliminating hunger in much of the world, commencing what is now known as the Green Revolution.

The same techniques can be used to change businesses. Consider the pharmaceutical industry. With research costs up significantly, the time needed to secure government approval of new products averaging a decade or more, and patent protection under political attack, many U.S. pharmaceutical companies have been increasing their focus on marketing while outsourcing many research and development activities. This has given rise to a new corporate species known as contract research organizations—companies such as PPD and Quintiles.

Conservation. Today we are more aware than ever of endangered species. We frequently intervene through laws, regulations, and organized action to protect them. The list of endangered species is long: elephants, rhinos, tigers, the giant panda, banks, automakers, airlines, insurance companies. While it may have been necessary for government to take the economy's reins in late 2008 and in 2009 to prevent an economic meltdown—a question economic historians no doubt will debate for decades to come—government intervention has its price: When government declares certain companies "too big to fail," it is disrupting the creative destruction necessary for economic progress.

If government similarly had intervened at the beginning of the 20th century, we might still be riding in horse-drawn carriages, lighting our homes with candles, traveling from New York to San Francisco on trains powered by steam locomotives, and snapping photos on a 35th-generation Polaroid. In business, "conservation" measures preserve some types of companies. By retaining them, the conservationists may delay or prevent progress.

Endemic species. Endemic species are those inhabiting a very specific location that is necessary for their survival. These include certain iguana, sea turtles, and plants found only in the Galapagos and the Venus Flytrap, found only within a 60-mile radius of Wilmington, N.C. In their native habitat, such species will thrive. Remove them, or introduce nonindigenous predators, and they could become extinct. Certain businesses—a brewery, for example—can exist almost anywhere; others, such as mines, ports, shipyards, and vineyards, can exist only in certain locations.

Many countries and regions of countries similarly seem to have uniquecharacteristics that prime them for success. Turkey seems to grow yacht builders, the U.S., entrepreneurs. Some believe it is the Wild West spirit of adventure and risk-taking that makes the U.S. the center of global entrepreneurism. Throttle that spirit through excessive regulation or taxation and we risk becoming just another country. While regulation can thwart the creative enterprise, it can also create conditions that make it possible for endemic institutions to survive. It's difficult to balance the benefits of protecting endemic companies that bring unique value with the protectionism that makes companies and countries less competitive.

Invasive species. These are non-native species brought into an area—sometimes on purpose, other times by accident—that later become destructive pests. Feral goats and pigs in the Galapagos are destroying the environment. Russian zebra mussels are wreaking havoc in the U.S., harbors in Canada and Europe, power plants, and water treatment facilities. Invasive species destroy some native species and cause others to adapt and change. U.S., Japanese, and European manufacturers face invasive species when they go up against low-cost rivals from China, Brazil, and other rapidly developing economies.

an iguana-eat-iguana business world

The lessons for business executives are several fold.

First, remember that there are no safe havens any more. The world of globality is full of invasive predators ready and eager to eat your lunch. You are in—or will be in—a battle for survival. Be ready to fight for your position.

Second, remember that your competitors have weaknesses as well as strengths. In this iguana-eat-iguana world, be prepared to exploit their weaknesses, as well as your strengths. Some things will work well for you in western markets, but not work well elsewhere. Be flexible. Be prepared to adapt, especially as you enter new environments. Find what works for you in each market or market segment and go with it, but don't expect it to work equally well everywhere.

Third, build on your strengths through mergers, acquisitions, collaboration, change. Doing this right will increase your ability to adapt, make your company stronger, better suited to new environments, and better positioned to win the battle for survival of the fittest.

However your company looks today is not the way it should look in 5 or 10 years. Be sure you are ready to compete with everyone from everywhere for everything. Long-term success requires constant change. Some of it will be subtle, some dramatic. Change is in the nature of progress. Anticipate change, manage change, master change, or your company could become the next Polaroid, needing dramatic conservation measures to save it from extinction.

    Before it's here, it's on the Bloomberg Terminal.