There is new light for the dismal science. Economics as a social science is concerned with the foundational factors underlying the production, distribution, and consumption of goods and services. And over the last century the application of economic analysis has spread and is seen across a diverse fields (business, finance, health care, government) and subjects (war, crime, education, law, politics, religion, social institutions, science, environment). Economics has become one of the most complex of fields to study and understand. But instead of growing more dismal, there is new light. Network scientists are providing old fields like economics with new ways to look at and understand these complex, networked systems. All too often, those furthest from the core discipline of a problem are most likely to provide an innovative solution.
In the words of MIT scientist César Hidalgo, economics is a relatively ephemeral subject, resting on deep roots in a process that goes back to the foundations of energy and matter and information.
And in viewing the economy in such primal terms, he concludes that the factors that drive resilience and innovation in nature’s networks or ecosystems — namely diversity — should likewise be predictive of an economy’s resilience, innovation, and ability to grow.
Traditional economic measures fail to capture the kind of diversity that drives growth. Identifying factors of production such as land, labor, and capital, misses an important point: Physical and human capital are not alike, nor are they comparable. Using market prices to aggregate goods implies a market where we can always trade the items we don’t need for the items we do. In the case of a bakery, are three ovens as useful as a complete kitchen? In economic terms, these two sets of assets might have the same value. But in practical terms, only one is a complete system or set of capabilities that can be used to create output.
“By focusing on diversity, we adopt descriptions of the economy that do not add apples and oranges, or car mechanics and miners, but which instead can gauge economic capacities while honoring these obvious distinctions.”
— César Hidalgo
Using product exports as a proxy for production capabilities, Hidalgo and his team have derived a measure called ‘Economic Complexity,’ and it is empirically predictive of how fast an economy will grow over the long term¹. It is in fact more predictive than all previously developed measures.
This raises the question: Can a firm’s future growth be predicted by its Economic Complexity?
How? Maybe firm complexity could be measured by the number of products produced? However, some things true for an economy are not true at the firm level. And as the simple cockroach or bacterium can attest, more complexity does not always confer greater survivability or growth. Just look at diversified conglomerates.
On the other hand, certain types of aggregation may be of value. A recent Harvard Business Review article pointed out that the existence of luxury groups runs counter to the idea that being part of a conglomerate doesn’t add value: A study of 350 fashion houses established that group-owned brands are more creative than independent brands. And three times more creative on average as rated by an industry journal over a period of 10 years. The key appears to be the quantity and variety of opportunities for rich learning and cross-fertilization afforded the staff (see Luxury’s Talent Factories, HBR June 2015)
So diversified firms with a strong unifying logic at the strategy level can and do outperform. There is a class of competitors that do outperform by being in more categories. Companies such as Apple and Disney embody this logic. These firms compete in multiple industries and have a diverse set of capabilities. But there are key unifying elements. What are those?
We believe they have radical clarity at their cultural or meme layer. In particular, clarity with regard to their strategies and efforts to uncover new, unexpected ways to combine elements and create new value. They have radical clarity as it pertains to enabling emergence!
“Companies that enjoy sustained success are typically founded on a coherent theory of value creation,” Todd Zenger says in HBR. The elements of this theory include an interlocking core strategy, values, and management disciplines, including an ability to execute. Together they make up an ecosystem that renders the whole greater than the parts.
Developing a theory of value creation requires viewing your organization as a networked ecosystem. Networks are the vehicle for the growth, dissemination, and use of knowledge. Knowing how to design and enable network interactions (internally and externally) that combine people and strategies in new ways will spark emergent innovations which pass further throughout the ecosystem. Feeding the greater whole with innovations is the key to enabling and managing growth. This is the bright side of complexification, and firms can capitalize on it by understanding network behavior.
“Companies that enjoy sustained success are typically founded on a coherent theory of value creation.”
— Todd Zenger
Disney, with its diverse set of business domains in its complex ecosystem, enables the interactions and innovation that feeds others and allows for the circular creation of characters, films, stories, amusements, toys, books, and other elements.
So, while economic complexity of a firm alone would not predict success we believe that a firm’s future growth can be predicted by the economic complexity of its ecosystem. We have found it is even more useful and accurate to also understand a firm’s Network Quotient (NQ) or ability to think and act in networks. The combination provides new light for the dismal science.
And yes, we practice what we preach. We find a wonderful duality of strength in our approach: That network thinking and design, as a core discipline, enables us to more readily frame problems, and since we consult in a variety of industries, the cross-domain knowledge and insights invariably yields new and unique answers to those problems. This is our way of managing the diversity of our networks to create fresh perspectives and growth for our clients.
What is your way of managing for growth?
¹ Greater than five years as swings in currency valuations and other volatility drown the measure in the near term.
This article is part of series on Economic Complexity and Network Quotient (NQ). We will continue expand on and explore these concepts and their intertwined nature, providing insight into how to gauge these elements for your organization. Additionally, we will begin exploring the process and benefits of transforming an organization to have a greater network awareness and higher NQ.