The Power of Feedback

Companies are living systems. They flourish according to the very same principles that foster sustainability in nature.

Among the most powerful of those principles is feedback. By receiving feedback - and adapting to it - companies evolve over time to create value, grow, and diversify, in ways that can serve their shareholders, and the many stakeholders that rely on them.

Future 500 has been a pioneer in advancing the concept that business is a living system - and that, by applying the principles of nature's complex systems, both companies and their communities can flourish, sustainably.

Our system is based on principles from our book, What We Learned in the Rainforest - Business Lessons from Nature, by our Chairman and President, Tachi Kiuchi and Bill Shireman.

Value By Design

Over a century ago, Adam Smith theorized that profit was a function of three factors of production: land, labor, and capital. By bringing these together in the right combinations, companies create value and return a profit.

But in reality, profit doesn't come from the factors of production themselves. It comes from the way those factors are brought together - the design and structure of the company, and of the people and resources it uses.

When Henry Ford founded the company that bears his name, he faced 300 competitors. Within a few years, all but three were gone. What made the difference? Design. Ford designed an assembly line manufacturing process based on the scientific management principles of Frederick Taylor. His innovative design radically cut the costs of production, and enabled Ford to deliver cars that regular people could afford.

Henry Ford used roughly the same mix of land, labor, and materials in his operation as his 300 competitors. The only real difference was the way he brought those resources together - the design of his assembly line.

Design is more than a contributor to value creation and profit. It is the foundation of all value, and the source of all profit. Every thing in the world, at its core, is exactly the same, physically. It is made up of the very same parts. What makes one thing different from another is the way these parts are arranged. This is their design.

For example, bring together a single proton and neutron to create hydrogen, and the simplest form of matter is born. Use different arrangements of protons and neutrons, and 100 distinct elements are born, each with unique emergent qualities.

Bring together the elements to form simple cells, and life is born. Merge simple cells with one another to form complex ones, and thought is born.

Bring thinking beings together, and communities are born. And from these, civilization itself.

All value, and ultimately all profit, is created by design. None is created by land, labor, or capital, except according to their design.

The Dominos of Value Creation

Feedback is the principle that drives the creation of new designs. Hence feedback is what creates value, and enables all profit.

How? In business and every living system, feedback triggers a complex pattern of change that drives innovation and adaptation, and generates profit.

But what is profit? We think of it as the difference between our costs and our revenues. My "profit" is whatever I get to keep, after taking money from you and paying the bills. Profit seems, at best, selfish.

Because of that, when we think of profit and the environment, we usually think of the two in adversarial terms. Every profit to us is a loss for the earth.

But much of what we call profit is not the creation of profit at all. It is the expenditure of profit. In the traditional economy, we take complex resources from the earth - like hydrocarbons, or living plants and animals. Then we "use them up" - we unwind their complex structure, and deplete them of the capacity to do work for us. That's not creating profit - it's spending it.

Nature does the same thing - but it takes another step. It creates new value from the old. It builds up the capacity of resources to deliver value. How? Through the process of feedback and adaptation.

Think of the process as a set of ten dominos, one lined up after another. The ten dominos of value creation. As each domino falls, it topples the next, generating value in the process.

The first domino is entropy, the imposition of a loss or cost. Entropy, the second law of thermodynamics, says that every conversion of matter or energy leads to a net loss of potential energy. Every use of a resource creates a cost. Without new infusions of fuel, systems will quickly expend all their energy and run down.

The second domino is feedback - the effect of the action. Entropy triggers feedback, as the effect of the cost is fed back to the system.

The third domino is adaptation. When a cost is imposed on a system, the system can either adapt, or die. Death is simply an extreme form of adaptation. But those systems that die obviously cease to evolve. Hence nature in effect selects for those systems that have the capacity to adapt in more elegant and life-preserving ways.

Thus, the fourth domino falls: specialization. As organisms adapt, they grow more refined, different from the pioneers. They become specialists, able to excel in more narrowly defined ecological niches, or places with particular types of soil, slope, sunlight, elevation, and moisture, for example.

Now the fifth domino falls: variation. Each new species creates space for myriad smaller plants and animals that fit into the niches around it. Each of these in turn creates more niches. Hence diversity drives diversity, and variation explodes.

Increasing diversity makes the system more complex, and with this comes the sixth domino: complexity. And with every thing impacting every other, the relationships between them become ever more complicated. Since every niche is shaped and sculpted according to its relationship to every other, all the elements of the complex whole are dependent on one another, the seventh domino: interdependence.

In a system of increasingly interdependent parts, every thing is related to every other, dependent on every other for its very definition. Each element of the whole becomes more unique, more specialized to a particular function. Yet paradoxically, this makes it less capable of functioning on its own. It is more individuated, and yet less complete. It falls into a condition of cooperation - some might call it integration - the eighth domino.

Ultimately, parts join together as pieces of a larger whole, and find that in serving the whole, they serve themselves best. As this larger whole becomes defined, something astonishing often happens. New properties often emerge. Not just in the forest, but in all complex systems. Not by an individual alone, but by individuals in the context of their times and their whole communities. This is the ninth principle - emergence.

Something new is created. A potential, a choice, a source of power, a bank account of new value. Hence synergy, the tenth domino, the principle in nature that accounts for its extraordinary ability to end-run entropy by preserving the energy - information in a new form.

As the dominos fall, change is inevitable, but it is not determined. Unlike physical dominos, these dominos can fall in any direction. The future is created by the actions we take in the present; and every action taken, no matter how small and inconsequential it seems, can change wholly the shape that emerges.

The Four Phase Business Life Cycle

Today's free market system taps this power of feedback - but its potential goes far beyond what we have experienced to date.

One of the factors that limits the development of business is its focus on growth as the only reliable source of profit. This belief is misguided. In reality, growth is just one phase in which a business can generate profit - and not a sustainable one. To sustain profits over the long term, a company must be managed to create profit through every phase of its life.

Throughout its life, every business - and every product or service within every business - cycles continuously through four distinct phases: innovation, growth, variation, and renewal. These phases are not unique to business. As it develops, every complex adaptive system cycles through the same four:

Innovation, when the system is designed - when its code is inscribed in its seed.

Growth, when that design is replicated - when the seed is planted widely.

Variation, when that design is refined - as it evolves into various and better forms. Product differentiation.

Renewal, when that design grows obsolete, and is replaced.

For example, breakthrough discoveries and inventions - from the steam engine and automobile to the computer and Internet - are examples of Innovation.

Yet by themselves, great inventions have little value, unless they can be produced and distributed en masse. Mass production enables this Growth.

But a single, standardized design can't serve forever. Soon, the core design must be varied and refined, to fit a myriad different circumstances and needs. Product differentiation is an example of this process of Variation.

Even endless variation, however, won't save a design that has grown fundamentally obsolete. When a product is replaced or a company reorganized, this is an example of Renewal.

Each of these phases is distinctively different. Each requires a fundamentally different management philosophy.

Innovation is a period of exploration, experimentation, and open-mindedness, as a winning design is sought. Creative styles of management work best in this phase.

Growth is a period of dedication and commitment to a narrow, targeted focus: we plant the seed, or reproduce the product, en masse. The methods of Scientific Management - first applied at Ford's assembly lines a century ago - serve best in this phase.

Variation is a period of continuous differentiation on a theme, with multilateral commitment to several related opportunities: we plant many seeds, all related. We produce many products, each a variation on others. The methods of Quality Management foster continuous improvement in this phase.

Renewal is a period of release and redeployment, when resources are liberated from old purposes, to pursue new ones: we replace the garden, we discontinue or reorganize the company.

The Primacy of Feedback

Feedback drives the creation of value, in business and in nature. The capacity of a free-flowing ecosystem to generate value through the extraordinary diversity of its designs - the capacity of a free market economy to generate value through the mechanism of markets - both of these are the result of the same fundamental principle - feedback.

When feedback is restrained - when markets are regulated without regard to cost, when nature is exploited without regard to impact - innovation and adaptation are prevented. And any system that fails to adapt fails to survive.

On the other hand, systems with advanced systems of feedback - businesses that receive a full range of signals, living systems with advanced senses - can adapt readily and continuously to change, and sustain both themselves, and the systems that support them.

That is why feedback is the principle at work in every tool and service of The Future 500.

Design, Development, and Maintenance by LoginIncluded and PapayaSoft