How to win during times of instability

There’s a thing called punctuated equilibrium. Basically you have periods of stability that are punctuated, every once in a while, with these periods of extreme instability that then resolve into a new period of a new and different stability. The concept of punctuated equilibrium came from evolutionary biology, and it’s since been adopted to describe an inherent behavior of complex adaptive systems.

Now markets are a complex adaptive system, as are many companies. Which means complexity science is telling us that periods of stability and instability are an internal, natural function of markets and companies.

We generally believe that periods of market instability are triggered by specific events: from the very large scale, e.g. political or economic conditions, to the smaller scale, like the emergence of a new technology, a quote disruptive innovation per Clayton Christensen.

And that’s not wrong, but it is a bit of an incomplete look at the causality of so-called disruption. Disequilibrium is a part of how markets, how complex adaptive systems, actually work, and considering it as a function of the system rather than as an outcome of an event provides a bit of insight on how to best navigate through the inevitability of instability.

So from here forward I’m pulling from a pretty fun 1997 paper, Strategy at the Edge of Chaos. The author explains that during those times of relative equilibrium, successful companies master the conditions for their success, and during the moments of disequilibrium, they develop a new way of winning for the new equilibrium that will emerge. But they kind of have to do both at once, since no one can predict when disequilibrium will happen or what the new equilibrium will be.

Makes sense. So how do we do that?

Well, first, abandon the idea of one focused strategy. While that type of focus could absolutely help you win in current conditions, it’s also likely to fail through and on the other side of instability. Instead, make multiple bets at once so that you’re prepared for a variety of futures. You can’t know what might happen; act accordingly.

Second, look for continuous adaptation rather than competitive advantage. I want to flag that competitive advantage is often a practice of codifying a way of operating. But when the competition that you’re in changes, as it can during moments of disequilibrium, so does your advantage. So continuous adaptation is a practice of finding temporary competitive advantage.

Third, make space for both routine and disorder. You need routine ways of operating in order to scale, but you also need some disorder alongside it to allow adaptations (i.e., new ways of operating) to emerge. Without adaptation, you can’t evolve.

This one is pretty abstract, so to clarify it I’m going to add something that wasn’t in the paper: We need to distinguish between adapting and evolving. During a moment of instability, you want to adapt to the short-term, changing conditions. i.e., Do what you see that you need to do. This is the only way you can then, on the other side of the instability, end up evolved into a company that is a master of the new equilibrium. So: adapt to evolve.

I’ll end with a personal note: I often tell my teams to use slow times to their advantage. Take a second to rest and then work on that future-facing project you keep talking about; it’s the only way to be prepared for the times that aren’t so slow. Mastering the existence of punctuated equilibrium is a bit like that, just at an organizational level instead of an individual level.

So I’ve seen this multi-bet, continuously adapted, embracing both routine and disorder approach work at many levels and I do personally think it’s a great way to evolve with disruption and disequilibrium. Thanks for listening.

Source: https://www.researchgate.net/profile/Eric-Beinhocker/publication/235361202_Strategy_at_the_Edge_of_Chaos/links/02bfe51387b9a0668f000000/Strategy-at-the-Edge-of-Chaos.pdf