Friday, January 28, 2005

The business world: it wants stability while it creates chaos

The New York Times reports that

Procter & Gamble, the consumer products company, reached an agreement yesterday to acquire the Gillette Company, the shaving-products and battery maker, for about $57 billion in stock.
Many people don't find business very interesting — just people trying to squeeze whatever profits they can out of whatever it is they are doing. But I don't agree. Business is a living laboratory for evolutionary (and agent-based) theories.

[Gillette has a better web site. Click the two images for the two company's web sites. I hope the combined company keeps the Gillette web team.]

Businesses more than anyone else live in real world of unpredictability — a world to which they are constantly required to adapt. No one can predict what's going to happen to the price of oil. But if your business depends on the price of oil, your are vulnerable to forces you cannot control. There are of course ways to hedge these risks. Futures markets, insurance, etc. can help spread risks if used properly. But these techniques cost money. So there is a trade-off between accepting risk and reducing profits (or not making any profits). (There is also the temptation to speculate in markets that were intended to reduce risk, thereby increasing risk.)

Similarly with technology. Who knows when technology is going to produce a new product or enable a new service that will cut into whatever it is that you are doing. Companies are often faced with the choice of cannibalizing their own market by selling a newer technology at a lower price to their own customers or seeing some other company take those customers away from them entirely. Companies that are unable or unwilling to adapt, are overtaken by those that do adapt. The article cited above also said that SBC Communications, one of the "baby bells," is negotiating to buy AT&T, what is left of the original parent of all the babies. SBC has apparently been much more successful in navigating the flow of communication technology change than has AT&T. Here is an extract from an article on this second merger.
Cellphones, high-speed Internet connections and video - not plain old phone lines - now determine the winners and losers in today's market. Cable providers and a host of new businesses that barely existed a few years ago can easily provide those services just as well as old-line phone companies.
Business people are famous for wanting stability. They are traditional conservatives (not neo-cons) because the more things stay the same, the less they have to worry about adapting to change. From the perspective of someone who has to learn to live in the world as it is (however it is), that makes perfect sense. That's why business often resists any change at all, even change that would seem to be good for business. One never knows what change will bring; there are often unintended consequences. If one is successful as things now stand, why change it? But of course the world isn't static. It changes all the time.

According to the article, there are many good reasons for the P&G-Gillette merger. Not least among them is the increased leverage the combined company will have with Wal-Mart — a company that didn't play much of a role in retailing not that long ago but that now can force price concessions from the largest companies.

So this merger does two things. First of all, it seems likely that it will produce a stronger combined company than the two pieces were individually — even though the two pieces were quite successful on their own. The merger apparently makes business sense and is not just an attempt by a CEO to aggrandize himself.

More interestingly, from an evolutionary perspective the merger will change the world in which everyone else must live. So even though companies tend to be conservative and generally hope that things will remain more or less the same, in some cases, they themselves create major changes.

This is a nice example of Gould's notion of evolutionary punctuated equilibrium — that the world remains relatively stable for relatively long periods but must then accommodate, through evolution, to some major change, such as a climate shift. The big difference is that in the modern, technology-driven business world the periods of stability are growing increasingly short, and the stability-punctuating events are increasingly more frequent.

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