Survival Under Stress

Venture capital has dried up. Business pages report on getting back to basics. It has even become fashionable to snicker about the foolish mass hallucination of the New Economy. Anyone with a new idea in a corporation is being told “cost cutting is our focus right now.” Corporate management has battened down the hatches.

Meanwhile, a few contrarian voices say that it’s a great time to start companies because talent is available, entrepreneurs’ valuation expectations have plummeted, and office space is cheap. And for existing companies, they say, it is not time to downsize but time to use freed-up talent to innovate in preparation for the next economic cycle.

So which is the right corporate survival strategy — contraction or exploration?

Nature offers some models for survival under stress. For instance, if a human being is plunged into icy water, the digestive system immediately shuts down, the heartbeat slows, and oxygen consumption is minimized. The organism tries to preserve its core functions and eliminate non-essential ones until its next breath can be taken. That’s a pretty good description of how many companies are reacting to the stresses of the current economy: contracting resources to those essential for existing core strategies and operations.

A different reaction to change can be observed in the complex adaptive systems that species have evolved to survive in fluctuating environments. In an ant colony, for example, while some ants ferry the spoils from previously located food sources, a significant portion of the colony always spends its time looking for the next find. In business terms, while the exploiters generate sustaining revenue, the explorers invest for the future. When the colony finds itself under stress from a change in habitat or competition from a new colony, it does not contract its operations, but actually movesmore resources from exploitation to exploration. More ants, not fewer, go off on search missions, and those taking care of the colony’s short-term needs have to make do with fewer resources. This helps ensure that the colony as a whole will increase its chances of survival by seeking out a more hospitable niche.

So which strategy makes more sense for a company? It depends. If the company’s industry structure and technology are stable and the primary cause of stress is change in cyclical demand, then “holding one’s breath” is probably the preferred survival strategy. If, however, the stress is a result of changes in markets, technologies, products, consumer expectations, alliances or labor patterns, then survival depends on shifting more resources to exploration of new markets, technologies and business models.

From a macroeconomic point of view, both strategies produce an adaptive response. When a company contracts its efforts under stress, it enables industry- and economywide adaptation by releasing its exploration resources — people and ideas — into the larger system. This supports the “good time to start a company” point of view. An organization that reacts to stress by internally redirecting its resources toward exploration is itself an adaptive system. This lends credence to the “good time to free up talent to innovate” argument.

As the economy becomes more interconnected, it is characterized more by rapid structural change and less by cyclical change. In this increasingly boundaryless world, where companies, industries and the larger economy constitute one seamless system, continual exploration and adaptation is becoming the preferred — perhaps only — strategy on all levels. Companies that choose to “hold their breath” may be benefiting economic evolution but at the expense of their own survival.

Will those companies succeed in shifting their survival strategy? Clayton Christiansen, in “The Innovator’s Dilemma,” is not optimistic, citing the enormous inertia created by corporate structures, cultures and expectations. However, Russell Howard, CEO of Maxygen, a company that breeds molecules, offers a different point of view. He bases his thinking on Richard Dawkins’ classic book, “The Selfish Gene,” which contends that species are only important as survival mechanisms for their genes. “If a chicken is just an egg’s way of making another egg,” says Howard, “then Dawkins might say that a company is just an idea’s way of making another idea. It’s not the company that’s important, it’s the people and the ideas in it that must go forward and reproduce.”