Cities, companies, and innovation – Why companies will die

Geoffrey West started his scientific career as a theoretical physicist before he shifted his attention to complex adaptive systems. He focused on interdisciplinary research with a specific interest in the commonalities that social systems share with biological systems: Could it be that cities or companies actually follow the same underlying principles like plants or animals? Is London a great big whaleIs Walmart an elephant?

As a starting point, he and his team investigated the role of networks, scaling and growth in biological systems. This work confirmed earlier observations from biologists and social scientists; but more importantly, it created a new conceptual framework that stretches across traditional boundaries of scientific disciplines. This research is founded on solid data analysis to deliver the quantifiable results that are essential for cross-disciplinary comparison of social and biological systems. Many of these results are surprising, and some are actually counter-intuitive: According to West, cities will keep growing, while companies are bound to die. That’s not really the news CEOs want to hear. So let’s have a closer look at West’s findings on the business world.

Why companies will die

Investigating the growth patterns of companies, West and his team observed that businesses essentially behave like living organisms, they scale in a sublinear way: to double the size costs only 85% more resources. That is the usual economies of scale we would expect of a business enterprise. More specifically, they found that a company’s growth curve follows the a sigmoidal pattern: fast growth in the beginning will slow down after a while and come to a full stop. For example, you can plot the data for profit per employee over the number of employees, and the results gives you exactly that s-shaped curve we know from the growth of individual organisms.

In the very early phase of a company’s life we do observe hockey stick growth, exponential, the sky seems to be the limit. That’s how we like to portray successful companies. But that’s only a part of the story of the life of a company. Once the initial phase of rapid growth is over (and West indicates that there seems to be a relation to company size, in the area of 50 employees or so), the growth rate will gradually slow down, and in the end growth will stop entirely. Which is exactly what we observe in living organisms as well.

Now, for living organisms we know and easily accept that they will die after a while. We are less willing to accept that the same is true for companies. Once their growth comes to a grinding hold, they will eventually die, be it by bankruptcy or by a merger: the company will cease to exist. The biological analogy that West found to describe company growth strongly reminds us that companies are rather ephemeral in nature: once the business model is exhausted, it will be disrupted, and the company will die.

What cities do and companies don’t

While that result in itself already runs counter to conventional wisdom, there’s an even more disturbing observation that West and his team made about companies. Or rather, an observation they did NOT make: companies do not show the superlinear scaling they had found in cities. According to West’s conceptual framework, sublinear scaling is a reflection of economies of scale, whereas superlinear scaling reflects wealth creation and innovation. And that then means that companies are dominated by economies of scale rather than innovation.

To me, that is the most striking result from Geoffrey West’s work: we seem to overestimate the importance of companies for innovation, while we underestimate the crucial role that cities play. With regard to innovation, cities are the soil for companies to grow on, companies don’t flourish without this substrate. The innovation supply chain starts with cities (the meeting and mating of ideas within a densely connected environment). Companies only serve as tools to pull innovation through, to develop and deliver innovation to the market, the users, the community. Now, obviously cities and companies have considerable overlaps, and out of necessity they work hand in hand to generate and deliver the innovation society needs to progress.

But how does that really work? Time to further investigate the relevance of West’s observations for our understanding of innovation.

 

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