Economic Gardening part two

Category: News & General Info

Published: Thursday, November 05, 2009

Economic Gardening

.....part two of a three part article by:

Christian Gibbons
Director, Business/Industry Affairs
City of Littleton, Colorado

EARLY LEARNING

Small vs. Large Companies

Almost immediately our thinking was challenged. As David Birch continued to refine his pioneering work about the source of new jobs, it became clear that only three to five percent of all companies were high growth and these were creating the great majority of new jobs. Birch coined the term "gazelles" to describe these nimble, fast growing companies, a term which has since come into widespread usage. This small percentage number turned out to be true for Littleton and seems to be generally true for most communities (company towns being the obvious exception). At the time small businesses were the sweethearts of the political world and indeed we had sold our own program under that banner. However, data started coming in, which indicated that it wasn't small business which were driving job creation but rather a few fast growing businesses (small companies that would soon be large companies). So we got out of the small vs. large debate. The real issue was about rate of growth.

Innovation

 What we did notice in fast growing companies was a high correlation between growth and innovation. New products and processes seemed to be their lifeblood. At about the same time, we discovered works by economists Paul Romer, Paul Krugman, Brian Arthur, Annalee Saxenian and others that seemed to reinforce this point. It's really ideas that drive companies and economies.

Based on this, we proceeded to develop a full blown 13-part seminar series to bring state-of-the-art business practices to Littleton companies with a focus on innovation. We ran these for four years trying to make dramatic differences in the revenues and employment levels of our target companies. Our goal was to make them all high performance "new economy" companies. We assumed that if we could expose local business people to these "best practices", we could develop superior business people. Instead, we ran head on into what most Small Business Development Center directors know in their heart of hearts—this activity is mostly a waste of time. Anyone who has ever dealt with trying to make superstars out of small business people knows the truth of this statement. After a couple of years of miserable failure in trying to create high performance companies, we lowered our sights. At one of the lowest points in the program, we discussed whether we should just try to move distressed companies to a stable category. But we continued to be puzzled why a few companies grew at sky rocket rates while most languished with low or no growth.

Temperament

 It was at this point that we discovered what may be our most profound insight about business: the temperament of the CEO is one of the major factors in the growth rate of a company. The temperament factor affected our thinking in two ways.

First, the Center for Application of Psychological Type found strong correlation between the fast growing companies and two CEO temperament types: in Myers-Briggs terminology, these were the Sensing-Thinking-Judging (STJ) and, even more important, the Intuitive-Thinking-Judging (NTJ). (Think Bill Gates, Jack Welch, Larry Ellison, Scott McNealy, etc.) These two temperament types headed up gazelle companies at rates far beyond their statistical presence in the population. The two temperaments represented about twenty-five percent of the total population but accounted for approximately seventy-five percent of the leadership in a study of the Inc. 500 fastest growing companies.

Second, in trying to understand why we weren't having any more success than we were, we always came back to the same fact: Temperament is not very amenable to change, at least over short periods of time. For those of you proficient in Myers-Briggs temperament styles, you will recognize the difficulty in getting Artisans (SP) to be good bookkeepers or introverted Guardians (SJ) to be sales people. Try to get a Rational (NT) away from their precious ideas and actually produce something or get an Idealist (NF) to deal with the non-human factors of business (finance for example).

This discovery of the impact of temperament put an end to our seminar and training program. It appeared to us that no matter what we did, we could not affect the growth rates of businesses much beyond what the temperament types and a few other factors determine. Most temperament types will remain in low or no growth businesses and a small proportion of temperament types will drive most of the high growth companies.

 Mechanical v. Biological

By the mid 1990s, another major factor affecting high growth companies was becoming apparent to us: businesses were biological as much as mechanical.

The great scientific discoveries of the 16th and 17th centuries about physics and chemistry (the non-living side of the universe) had created strong mental models which were mechanical in nature. Humans invented one mechanical device after another in which known inputs produced known outputs in a very predictable and controllable fashion. This mechanical mind set that things were controllable and predictable tended to color how we saw biological entities like organizations and economies.

The Santa Fe Institute, however, saw something different. They saw a biological world in which each living thing was constantly adapting to all of the other living things, all tied together by innumerable feedback loops. They saw a complex world in constant turmoil which was both unpredictable and uncontrollable. Any parent could tell you that two children raised in the exact same home under the exact same conditions can turn out very different. Any employee can tell you that the organization chart has less to do with how things get done in an organization than the relationships between people. And yet business managers and economists still talked as if organizations and economies were machines (rev up the economy, steer the organization) and not living, biological things. Revving up a rainforest or steering a wolf would sound ridiculous but well educated people continue to talk about organizations and economies as if they were mechanical in nature. It took Nobel Laureate scientists to show us that unpredictability in companies and economies is a deep law of living things. The emerging science was called "Complex Adaptive Systems" or "Complexity" as we came to know it.

Edge of Chaos

Although based on complex mathematical formulas using massive computer power, complexity science produced some handy rules of thumb for every day use. One of the most colorful is "edge of chaos."

This term describes the fine line between stability and chaos where innovation and survival are most likely to take place. As a way to think about these regimes, consider what form H2O takes in each. In the frozen regime, it would be ice. In the stable regime, it would be water. In the chaotic regime, it would be steam.

Organizations and economies also operate in these three regimes. In the frozen regime, no information gets transferred and no activity takes place, so it is impossible to adapt. In the chaotic regime, information and change takes place so fast that nothing is stable enough to retain its identity. In the stable regime, there is a regular rhythm of activity in which identity is retained but adaptation to changing conditions is slow. While humans may favor stability, nature favors the line between stability and chaos (edge of chaos) because it is here that constant adaptation goes on which allows an organism to survive over the long run.

Once we understood this idea, we could see it operating in Littleton's business world. We had very stable companies on Main Street which just could not adjust to a fast changing world. WalMart's rapid innovations were destroying our smaller retailers. Our high growth companies, on the other hand, were innovating quickly. They sensed the changes going on and responded rapidly. Sometimes they would fall into complete chaos but most often they would ride the very edge of chaos like a seasoned surfer.

We came to equate the edge of chaos with lots of changes and experimentation and lots of little mistakes. It seemed like the mistakes that accompanied the process of innovation were like earthquakes: if you don't have lots of little ones, you end up with a big one. We read a study out of Dallas that indicated the most vibrant economies (in terms of producing jobs and wealth) were highly unstable in the sense that they had the highest rate of business start ups and business deaths. This turbulence also looked like an economy operating at the edge of chaos.

We started looking for other reality checks. The big, stable companies of the 1970's like GM and IBM appeared to us to be in very stable regimes with minimal change or innovation. They, in effect, were headed toward big adjustments because of their very stability. They had lost contact with the chaotic edge and had quit adapting. People with entirely different ideas about cars and computers produced products better fit to a changing environment (the raucous din of a vibrant market place operating at the edge of chaos). At the economy level, the Great Plains appeared to be a situation of great stability with minimum innovation, minimum adjustment. The plains were dying economically. The USSR appeared to be a frozen regime that had not allowed adjustments for over 70 years and then one day it collapsed in one big adjustment.

It also occurred to us that temperaments in organizations are much like regimes. Guardians are stable tending toward frozen ice while intuitives are chaotic like fire. Organizations that adapt and survive over the long run are neither ice nor fire, they are both. Intuitives provide the ideas, push for the changes. The Guardians provide the stability and the order that allow ideas to come to fruition. Chaos and stability in tension with each other locked in the same system. Fire and ice. That description definitely fit our high growth companies. It also felt like "the edge of chaos" again.

Self Organization vs. Command-and-Control

There is a related principle in complexity science called self organization. Scientists now know that nature runs large scale operations and it does it rather well but without anyone in control. There is no CEO in the ant den and there is no president of the board issuing instructions in bee hives. No squadron leader barks flight orders to a flock of geese. Ants and bees and geese operate on simple, local sets of instructions with short feedback loops and out of this order emerges. The work of the ant den and the bee hive gets done with no one in control. The flock of geese maintains its shape, identity and function with no one in charge.

Most large business organizations (and some remaining socialist economies), on the other hand, work on a command-and-control model. The problem long identified with large command-and-control structures is that the cost of coordination and communication (organizational drag) eventually outweighs any benefits of specialization and economies of scale, and things grind to a halt. Self organization is a little more chaotic but it is also more robust, more redundant and more likely to survive. What this means in a real sense is that the larger an organization gets, the less command-and-control works. In our every day work, we could see that the organization of gazelles was different than large, stable companies. Gazelles seemed to "just do it" and yet it all came together. Large, stable companies "just ordered it" and put into motion large numbers of meetings, committees and report generation.

Increasing Returns

 Economist Brian Arthur has spent much of his life's work documenting the existence of increasing returns (as opposed to the classical idea of decreasing returns). Arthur's contention is that winners continue to win because they have won in the past. His prime example is VHS vs. Beta tapes. Although Beta was generally acknowledged to be the better technology, a critical mass of people opted for VHS early on, which created a large installed base and all of the supporting technology decided to move to where customers were concentrated.

Increasing returns can be seen operating in college athletics (good players go to Notre Dame because Notre Dame wins…because good players go there), products (people use Microsoft operating systems because it has the most software written for it…which is because most people use it) and, we think, economies (companies move to hot urban areas because of the large specialized labor pool, which is there because of the large number of companies).

ECONOMIC GARDENING TAKES ROOT

 By the late 1990's, a number of communities (including Lake Elsinore, San Bernardino, Chico and San Luis Obispo CA; Santa Fe NM; Lancaster County PA; Steamboat Springs CO; the State of Wyoming; and the North Down Borrough of Northern Ireland) were beginning to investigate and experiment with economic gardening.

"Econ-dev," which had been our Internet mail-list about economic gardening since the early 1990's, changed from our singular observations to a full discussion of entrepreneurial activity by a number of talented people. Over 300 practitioners, consultants, academics, media members, politicians and students in twenty some countries were monitoring the site.

Others began to take notice as well. Littleton's program won the National League of Cities national award for innovation in 1998 and was cited for innovation by the U.S. Economic Development Administration and the University of Minnesota. Stories about economic gardening appeared in Governing magazine, BusinessWeek, Nation's Weekly, Business Expansion Journal and ICMA as well as an interview by National Public Radio.

The Issue of Local Culture

 As new people added their insights and experiences to the cause, it became clear that we had only the most rudimentary understanding of entrepreneurial activity and were working with the simplest of frameworks (support entrepreneurs and things will get better). As I made presentations to other communities who were interested in the approach, I began to sense it wasn't quite that simple.

Even though we knew the tools and techniques that helped make entrepreneurs successful, there was another intangible (but very real) factor keeping local economies from improving. For the lack of a better word, I initially called it the "culture" of a community. By this, I meant the way that entrepreneurial activity and risk and innovation and even diversity and newness are viewed by local people.

The Commodity Trap

 In particular, I began to see a distinct pattern in "resource production" towns - communities that existed primarily to produce natural resources (farming, ranching, mining, timber, fishing). Because natural resources tend to be commodities - that is there is no difference between them - the consumer makes a decision based on the lowest price. Thus commodity producers are in a race to the bottom to provide ever cheaper prices which puts extreme pressure on employee wages.

Commodity production is not only the major reason for widespread poverty in these types of communities, but it also affects mind set about entrepreneurial activity. When profit margins are razor thin, a single mistake can send a farm, a ranch, a saw mill, a mine, a fishing boat into bankruptcy. Fear of mistakes and failure becomes paralyzing to innovation and risk.

Commodity businesses are also prey to capricious natural disasters. A good wheat crop can be ruined by last minute hail. A drought can decimate cattle herds in a single summer. A 100 year old timber stand can be wiped out in a single fire. A "perfect storm" can send a fishing fleet to the bottom of the sea.

 In communities that lived with these twin pressures of commodity pricing and natural disasters, evolutionary selection favored people who did not take risks. Those who took risks failed or moved or died in poverty because of the unrelenting and unforgiving nature of commodity businesses. Thus the very characteristic that ensured their survival in a harsh economic environment was the same characteristic that prevented them from fostering entrepreneurial activity.

 Interestingly, commodity towns tried to improve their situation by recruiting commodity industries. These towns billed themselves as low cost environments for business—low labor costs, low land costs, low utilities, low taxes.

These, of course, are the primary drivers of commodity industries: to keep costs down so they can keep prices down. Recruiting "successes" brought in commodity businesses who stayed as long as costs were low. When the standard of living started to rise, the commodity companies left for Mexico or southeast Asia where costs were even lower.

All of this bred a sense that the local community was no longer in control of its future. Blanche Dubois in A Streetcar Named Desire had a line that went, "I have always depended on the kindness of strangers." In some respects, these communities no longer felt that their own entrepreneurs could save them, but rather they depended upon "the kindness" of some other community's entrepreneurs.

This same anti-entrepreneur "culture" also cropped up in areas where large corporations dominated the landscape. It seemed that in areas where big corporations employed a large percentage of the population, the typical employee saw wealth and job production as very distant from his or her realm of control. Any sense of self-reliance was bred out of the "culture." There seemed to be a massive sense that "someone else controls our economic future and that's just the way it is."

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