Special thanks to Oleg Evgenievich Klepikov and Aleksandr Lukich Gaponenko.
Our first meeting with Mr. Gaponenko took place in the lobby of Crowne Plaza hotel in Moscow World Trade Centre in 2017. I was considering enrolling in the Doctor of Business Administration course in IBBA at the Russian Presidential Academy of National Economy and Public Administration, at the moment. Surprisingly, the meeting turned out easy to arrange and proceeded very naturally, despite the fact that I had set very difficult tasks, i.e. to understand and structure the mechanisms of ideology creation and functioning. I was concerned with the realisation that there were really few experts of that profile or at least someone who would have a deep understanding of the area. A couple of days after the meeting, Aleksandr Lukich called and said that he knew a specialist who could help me understand the issue. A few weeks later, I found myself in the office of PSYCHEA, sitting in a meeting room with a glass wall that turned opaque at the press of a button, providing complete privacy. Although I can’t say that it was the only amazing event on that day. Acquaintance with Oleg and the first 1.5 hours of the conversation flew by like one minute. It was a sprint. He fended off all of my ideas and suggestions, explaining it to me that they were far from what I really needed. I got caught up in thought in the evening. For the next 1.5 years, we had regular meetings to discuss my future thesis paper, but even formulating the topic appeared to be a difficult task. Time went by. After each meeting, I took my time to think and came back whenever new ideas or questions would occur to me. Oleg told me not to worry, because as soon as we found the right topic that was really important for me, it would very quickly “pave its way” on paper. Amazingly, he turned out to be right. Suddenly there it was! And on the day that followed another meeting, I just got into the car and made it to the sea to write my paper. It was early spring and the awakening nature was a true inspiration. The entire year that followed passed in formulating the vision that I describe in this book. Well, let’s start!
As an introduction to the book, the author offers for analysis two typical cases from the world of Russian business, which reflect the idea of this book. The first case is fairly obvious and lies “on the surface” – the creation of the Sukhoi Business Jet aircraft line. In the early 2000s, the Sukhoi State Corporation decided to diversify its product line and release a civilian aircraft. The stake was placed on the development of a short- and medium-range narrow-body aircraft. In 2008, the first Sukhoi Super Jet made its maiden flight. The company’s management decided to go further and enter the business aviation market. As a result, the Sukhoi Business Jet project was launched. However, while the company faced a number of more or less solvable challenges while creating the Sukhoi Super Jet commercial aircraft, the full-fledged entry into the luxury goods market proved to be an impossible task for the Sukhoi State Corporation. The company has so far failed to go beyond the niche of a producer of goods for the public sector and governments of some friendly countries. It should be born in mind that the company has a significant financial and administrative resource, as well as a very high-quality engineering school of aircraft construction, laid down back in the USSR, which allows it to keep a very high bar in the world arms market. From the technical perspective, some of the modern military aircraft of Sukhoi Group are unsurpassed in terms of their flight qualities and technical solutions. Thus, it is neither financial nor technical components that form the source of the problems of the Sukhoi Business Jet project. From the point of view of the model proposed in this study, Sukhoi Group sticks to the strategies that actually prevent it from entering a new market. If we draw parallels with nature, then the company can be associated with representatives of an arid desert, where resources are scarce, the choice of strategies is very limited, and the toolkit is straightforward. In Sukhoi Group, financing comes from the public budget, and the consumers of the products are also state-financed entities, i.e. the Armed Forces of the Russian Federation or of other countries. The customers’ preferences can be described in a standard requirements specification, and the finished products acceptance is carried out in accordance with an agreed algorithm. Meanwhile, the market to be penetrated in conformance with Sukhoi Group’s plans is governed by completely different laws. Drawing parallels with the animal kingdom, business aviation market players (e.g., Bombardier, Gulfstream, and Embraer, as well as separate divisions of Boeing Business Jets and Airbus Corporate Jets) are prominent representatives of apex predators with complex behavior patterns. Each aircraft is a separate project, implemented for a specific client and customised based on their specific preferences and wishes, the requirements being more exacting, the strategies being more complex, and the product being non-standard. To achieve this level of service, a state corporation needs a completely different nature, structure, a different corporate culture, and a different set of strategies. Sukhoi Group simply does not fit into these rules of the game. The chances of squeezing into this difficult niche using the usual approach are minimum. The only way out would be to create an autonomous market-oriented enterprise operating beyond the rules typical of state corporations.
The second case describes a more subtle and complex situation regarding selection of a top manager for a large company. This story unfolded between 2016 and 2019 and involved X5 Retail Group (Alfa Group) and Magnit retail chain. The shareholders of the Magnit chain of stores decided to entice the top manager of X5 Retail Group (Alfa Group) to manage a newly acquired asset, but the new CEO not only failed to repeat the previous success, but also led Magnit to worse results than those with which the activities had been started. As a result, the CEO was removed from the position. The development of the situation looks paradoxical outwardly. In the mean time, it can be assumed that the key mistake must have been the lack of understanding by the new shareholders of Magnit retail chain of the identity of their asset. Let’s study this case in more detail and first define the characters.
Magnit (legal name JSC Tander) is a Russian retail company that owns a chain of food stores. As of the first half of 2019, the retail chain consisted of 19,223 retail outlets and 37 distribution centers. The company’s own fleet of vehicles comprises about 6,000 vehicles. The company’s stores are located in 3,077 settlements in Russia.
X5 Retail Group (X5) is one of the leading Russian multi-format food retailers. The company operates stores in several retail chains: proximity stores under the Pyaterochka brand, Perekrestok supermarkets, Karusel hypermarkets, and stores “within walking distance” under the Perekrestok Express brand. As of the first half of 2019, the total number of outlets was 14,779, and the retailer had 41 distribution centers. Geographical coverage was 7 out of 8 federal districts of the Russian Federation. The transport fleet owned by X5 Retail Group consists of 3,830 trucks.
Thus, both companies are in approximately the same “weight category”. Magnit’s problems became noticeable in 2016, when the chain started lagging behind its main competitor, X5 Retail Group, in terms of growth rate. At the end of 2017, Magnit cedes the leadership in revenue in the Russian market to X5 Retail Group, its net profit getting almost halved – from 54.4 to 35.5 billion rubles. The asset actively falling in price is then bought out by VTB Group in early 2018, Sergey Galitsky, the founder of Magnit, selling 29.1% of the shares. Just a few months later, the VTB financial group resells a part of its stake, about 12%, to Marathon Group, an investment company founded by Aleksandr Vinokurov and Sergey Zakharov from A1.
Following the changeover of its shareholders, Magnit obtains new top management. The position of CEO is offered to Olga Naumova, who until the spring of 2018 led the Pyaterochka chain and achieved very noticeable results in her position. Since 2013, Naumova has been able to accelerate revenue growth and expansion rates, as well as update the stores. While at the end of 2013 the revenue of Pyaterochka stores amounted to 348.39 billion rubles (65% of X5's net retail revenue), shortly before her departure the turnover exceeded 1 trillion rubles (77.8% of the total revenue of the retail group). The number of stores in the chain also increased — from 3,882 to 11,225, which is quite impressive.
The choice of Magnit chain new shareholders in favor of Naumova was absolutely logical: to get a ready-made and highly successful manager from a direct competitor would seem to be a real bargain. The prospects are excellent. A successful top manager has taken the lead. However, something went wrong then. As it follows from its financial statements, Magnit’s revenue grew in 2018 by 8.2% (up to 1.2 trillion rubles), but the company failed to catch up with its main competitor — X5 Retail chain. X5's indicators were growing faster and in 2018 its turnover increased by 18.5% (up to 1.53 trillion rubles). Thus, the gap in turnover between the competitors sharply increased over the year. At the end of 2018, the American investment company OppenheimerFunds, owning 7.3% of shares, withdraws from the capital of Magnit.
To understand the reasons for this outcome, it is necessary to study the history of each of the companies carefully and to figure out their essence. The largest stake in X5 Retail Group belongs to co-owners of Alfa Group, a part belongs to the founders of Pyaterochka and directors of X5 Retail Group, and there are also free float shares. Considering that the majority shareholder is Alfa Group, it is worthwhile to study its essence more closely.
Alfa Group was founded in 1989, and today it is one of the largest private financial and investment consortia in Russia. At the time of the company foundation, the USSR’s legacy was about to be divided, and Alfa Group was being built as a structure ready to actively participate in mergers and acquisitions. It was characterized by posession of a staff of specially trained lawyers specializing in mergers, acquisitions and corporate conflicts, the rigid centralization of power in the management company, the presence of a “trooper” landing in newly acquired companies and taking over their management. Alfa Group was born, grew up and survived as a “predator” in the aggressive environment of the 90s, and X5 Retail Group is a very similar structure. It was created largely through mergers with other structures, absorbing ready-made retail chains and restructuring formats.
In the mean time, Magnit could hardly claim to be a predator. The founder of Magnit did not plan to participate in the division of the USSR’s inheritance and was building a family company. The key positions were held by the people close in kinship or in values, and the project developed mainly based on organic growth. Avoiding capital cities, clearly saving on store interiors, Magnit focused on efficient logistics and ensured low prices for goods on the shelf. Magnit went through cost optimization and fine-tuning of internal processes, not resorting to takeovers of competitors. On completing the transaction with VTB Group, its founder S. Galitsky left the business, having by the time of the sale already accumulated a number of systemic contradictions, including those related to the resignation of Vladimir Gordeichuk, a key partner and CEO of CJSC Tander. Olga Naumova, invited from X5 Retail Group to the position of CEO, inevitably encountered a completely different nature of the business. Despite the fact that she came from a direct competitor, X5 Retail Group, Magnit chain was a completely different entity.
Olga Naumova and her team found themselves at the head of a company, which was developing within the framework of the strategy of survival in the regional market. It is obvious that the management of such a company involves completely different principles and a different approach than the ones applied with X5 Retail Group. When looking at the situation through the proposed paradigm, it becomes clear why at the beginning of 2019 a new position of president appeared at Magnit, which was taken by Jan Dunning, former Lenta’s CEO. As the RBC news site wrote: “In the new configuration, Naumova will continue to be responsible for the entire work of the company, while Dunning will deal with strategy and interaction with shareholders.” However, a few months later, at the end of June 2019, Olga Naumova left the company. As a result, Magnit suffers significant losses and changes its position in the competition from the leader to the one having to catch up. Due to the drop in the capitalization of the retailer, shareholders lose billions, while X5 Retail Group continues increasing its turnover.
Thus, in the above examples, we see that the different natures of the companies impose different restrictions on their development, which leads to the fact that application of some traditional approaches to the development of the company leads to failure. Despite the external similarities of the two companies, i.e. the same market, the same specificity, and equal weight category, they turned out to have a completely different essence, which in the end gave completely different results.
For a predator, some losses in fights with opponents are commonplace, and the company has the skills to replace the lost competencies. X5 Retail Group quickly replaced the top manager that left, regrouped and, without unnecessary hype in the media, showed concrete results — an increase in the revenue and capitalization, as well as capture of an even larger market share. Meanwhile, Magnit, which had an excellent start in the form of a state bank as a shareholder and a top manager from a competitor, was unable to reach the potential.
It is obvious that Olga Naumova, a native of the clan of predators, having joined the new company, found herself in a very unexpected environment for herself. They hardly prepared for the seizure of new territories and battles with opponents. Obviously, all the available tools were not formatted for the Alfa-Group style of operation. Instead of adapting her own role, the new director decided to remake the entire company to what she was used to, trying to change the nature of the company. This is confirmed by the announced new development strategy, including rebranding. However, changing the nature of a business structure is a task that requires a long time and significant inner changes. That said, one shouldn’t forget about the environment, where the race for market leadership did not stop for a moment and the resources of both companies were being actively spent to maintain the pace. Accordingly, any complex operation carried out “on the fly” has a low chance of success.
There is a number of similar examples in the world of business, the positive or negative results of which, when viewed through the proposed model, become understandable and logical. For instance, the outcome of the Skolkovo Technopark residents performance on the international market, the development of the Aurus car project, attempts to purchase the Brazilian company Embraer by Boeing, the purchase of Tiffany by the LVMH holding, and many other cases.
The study substantiates that the cases considered and similar ones have the same nature and similar reasons underlying the resulting consequences. The range of problems to be solved within the framework of this study will be formulated as follows: why do even large companies with substantial resources make big mistakes? How can one take into account factors that cannot be identified by using the classical approach and traditional business models in the process of taking complex strategic decisions?
The answer to these questions lies in the special view of business structures described and justified in this study. The object of the study is to create a new model of business vision, as well as to develop recommendations for the model application. The work was based on classical principles and models that are already known and have proven themselves in practice. These are Charles Darwin’s Theory of Evolution, genetic algorithms, Spiral Dynamics, the Rainforest model of the Silicon Valley from V. Hwang and G. Horowitt, the Blue Ocean Strategy of W. Kim and R. Mauborgne, Corporate Lifecycle Model from Dr. I. Adizes, C. Christensen’s Jobs-to-be-Done concept, R. Dilts’ Pyramid of Logical Levels, the T.O.T.E. Model, Carl Jung’s theory of archetypes, the Propaganda concept from E. Bernays, D. Ariely’s Predictably Irrational, PSYCHEA model of O. Klepikov and A. Murazanov.
The synthesis of these models makes it possible to create not just another model, but to formulate a novel outlook on the existing models and tools in the field of management, which are of a mechanistic nature. The new model takes into account not only mechanistic relations, but also organic, social, and psychological relationships. It enables prediction of the competitors’ behavior and gives understanding of their capabilities and development potential. The study is structured according to the principle of describing classical theoretical models, identifying their principles of operation and interconnection with each other, analyzing practical examples, and then the final practice-oriented model for entrepreneurs and managers is proposed and described in stages.
Chapter 1. Theoretical Models
In December 2019, during the plenary session at the “100 Steps to a Favorable Investment Climate” conference, an important thesis about the future of business was aired by Konstantin Polunin, a partner of Boston Consulting Group (BCG): “Companies will determine their right to exist in terms of the cumulative systemic effect rather than in terms of return for shareholders”.
In recent years, it is often suggested in the professional community that the study of complex, self-generating, self-organizing, nonlinear, and adaptive systems will become the most relevant in the 21st century, the main meaningful goal of the organization and its mission (rather than the self-preservation of the company) being the key factors to these systems. The new paradigm will view business structures not as organizational models, but as living organisms. The solution to the task of building the next generation structure will lie more in biology and psychology than in engineering and finance. But in order to understand this thesis, it is worthwhile to study more closely what it can be based on, what theoretical models may underlie this assumption. The book will describe the models that form the basis of the hypothesis that it is much more effecient and far-sighted to perceive business as a living organism.
1.1. Types of Cooperation Models
To begin with, some starting point should be determined, and the idea described in the book Reinventing Organizations by F. Laloux shall serve as a basis. The book comprehends the accumulated experience of human cooperation models, which reflect the mankind development history and consciousness development level, and presents a novel idea that can describe the existing complex interrelationships in more detail than generally known concepts. Organizations as models of cooperation between people are always bound to the currently dominant people’s worldview and consciousness development stage. Each time humanity as a species changed its method of world cognition, it grew to new, more effective types of organization. At the same time, such growth did not occur evenly, evolution proceeded in leaps and bounds, like transformation of a caterpillar into a butterfly. Each rise to a new stage of self-consciousness opens up unprecedented abilities and opportunities for humanity, and each new stage of development endows a new model of organization.
Let us consider the following models of organizations in today’s business environment. The companies are divided based on the principle of the underlying organizational structure, and for the convenience of distinguishing them, each is labelled with a color in compliance with the ideas of F. Laloux.
Business is built according to ethnicity or family ties. The management style is manual control. The decision-making body is often comprised of a family members council, with the leader serving as a chairman of the council and announcing decisions. In such a business, the role of the leader does not imply autocracy, but rather is to coordinate opinions, lead and control the wealth of the family. For these companies, healthy social relationships in the group are more important than production schedules. The leader’s life belongs to the family where he serves the clan, and not vice versa. The use of awards in the form of reward for individual achievement in such organizations is unlikely, since the reward separates good workers from the rest of the group, i.e. from the family.
Small Business, Startups (Red Organizations)
This business is characterized by the presence of strong personalities who quickly find themselves at the top of the power pyramid. Leaders in such organizations show a high level of energy, take risks, are ready to fight “for territory”, while being able to create innovations and challenge the system. Thinking in this case is formed by the opposites, creating a black and white picture of the world, and in the end everyone is divided into winners and losers. The management style is maintained at the level of manual control. Leaders show tough hegemony in decision making. There is no planning in these companies, since the stake is made on achieving immediate results. Red Organizations are well adapted to cope with chaos, but they are not fit to create complex results in a stable environment where planning and strategy development are possible.
Formal Hierarchies (Amber Organizations)
The overall structure is established in the form of a rigid pyramid with a cascade of formalized orders from bosses to subordinates. In such companies, processes and procedures are very tightly regulated, which leads to a flourishing bureaucracy. Rule-making authority is associated with a social role rather than a strong personality, thus creating stable organizational structures that are sustainable and capable of large-scale development. Notable examples of Amber Organizations are government agencies, the church, and the army. Authority is comparable to a priest in vestments or a general in uniform, and it doesn’t matter what kind of person he is – the form determines the authority. The distribution of remuneration is carried out in accordance with the position and length of service. Each element of the organization understands its exact location and has to act according to the rules of the system. The outlook on life in such structures is static, i.e. there are unshakable laws that divide things into right and wrong. If members of the organization do the right thing, they will be rewarded, and should their behavior fail to conform to the accepted norms, members of the group breaching the established code of ethics may be rejected by the community.
Companies of this level have an understanding of causation, which allows to reproduce past experience and leads to creation of a planning system. Planning and implementation of plans are strictly separated. The thinking takes place “above”, the execution is done “below”. Management is based on the principle of “give orders and follow up”. The philosophy of the Amber Organizations suggests that employees are mostly lazy, dishonest, need supervision, they need to be monitored and told exactly what is required of them. New ideas, individual achievement, critical thinking, and self-expression are not encouraged. Human resources are virtually completely interchangeable. Order and stability — subordination, formalized internal processes, and clear rules — reign in these companies.
Competitive Companies (Orange Organizations)
These companies are perceived as machines and include rigid structure and formalization of processes inherent in a formal hierarchy, though adding to this model innovation, responsibility, and meritocracy.
Innovation enables them to reach the heights of innovation unattainable for Amber Organizations, as leaders of such companies perceive initiative and changes as an opportunity rather than a threat. Responsibility shifts the management approach from “order and follow up” to “anticipate changes and control the situation”. Individual divisions of the company are empowered to think and act in accordance with the current situation and to bear responsibility for their own results. Up to a certain level, management does not care about the method of achieving the goal. Efficiency becomes the basis for decision making. There is nothing absolutely right or absolutely wrong in these companies, instead there are things that work better than others.
In such structures, people are driven by the desire for material success. To put it simply, while in the formal hierarchy the “stick system” only is implemented, in the conditions of competitive companies a “carrot and stick system” has been created.
Orange Organizations have adopted the idea that everyone can climb the career ladder through their abilities. People are viewed as individuals having an opportunity to escape from the stratum of society in which they were born. They can choose a profession based on their own talents and understanding of their vocation. However, their role will ultimately be limited to the function of the position they will occupy in the organization. It is this idea that contributes to the development of a wide range of HR tools: personnel performance assessment, incentive system, human resource planning, headhunting, leadership development trainings, career planning, etc. There’s no merging of the personality with the position, as in the formal hierarchy, however, in the Orange paradigm, people begin to wear professional masks. It is essential to appear competent, calm, in control, successful, and ready for new career challenges.
Management in such companies is result-oriented, focused on solving material problems, and in the end it all comes down to goals and numbers, control points and deadlines. Impassive and objective rationality is valued. At the same time, feelings and human relationships are not important, and the questions that may arise with regard to the reasonability of the goal are simply inappropriate. On the other hand, over just two centuries, this outlook has brought humanity to an unprecedented level of prosperity and technological advance.
Companies of this type have a pluralistic view of the world that is incompatible with power and hierarchy. Green Companies take the approach that all points of view deserve equal respect. In such organizations, leaders are considered to serve those for whom they are leaders, so sometimes in these types of companies, managers are appointed not “from above”, but “from below.” Subordinates choose their own boss after interviewing suitable candidates, which naturally stimulates the manager to act as an assistant leader. Decision-making processes are “bottom-up”, each opinion is taken into account, and conflicting points of view are brought to a consensus. Group members seek justice, equality, and harmony.
In such companies, employees are integrated into the structure and become part of the whole, maintaining harmonious and close ties with everyone. A deeply rooted culture shared by all employees is the basis and “glue” for the entire structure. This enables granting extended powers to the supervisees. Employees are expected to be able to make the right decision on their own because they share and are guided by common values.
Most Green Organizations strive for lofty goals. For example, Southwest Airlines does not consider itself to be just an airline, but insists that their business is actually freedom. They help their customers get to places they would never have been to if it weren’t for the low prices on Southwest Airlines. Green companies are convinced that businesses bear responsibility not only towards investors, but also towards their employees, customers, suppliers, local communities, society at large, and the environment. The role of the leadership of the organization is to balance interests and keep everyone happy. Social responsibility is often reflected in the mission of Green Organizations, which provides a high level of motivation, encourages innovation and strengthens the corporate spirit of employees. Family can be a metaphor for such companies.
The most exciting breakthroughs of the 21st century will not occur because of technology but because of an expanding concept of what it means to be human.
Teal Organizations are built upon the idea that all employees are competent and responsible persons that know how to do their job correctly on their own. The Teal Company is self-governing, the organization consisting of small teams, all employees being fully responsible and having all the rights to make all decisions. Power and responsibility are concentrated “below”. In such companies, the goals of the organization’s existence are always formulated, and they never include maximizing profits. These structures are based on three key principles:
1. Self-organization: the organization encourages initiative at the local level; the company is decentralized.
2. Integrity: The company perceives employees as living people with all inherent needs and emotions, even if they are not really needed for work.
3. Evolutionary goal: business expansion and profit making are not primary objectives, it is the project social significance that is of the highest priority.
This approach in building a model of cooperation between people opens up new opportunities. F. Laloux, the author of the idea, is convinced that such companies are seen not as families or inanimate machines, but as living beings that are endowed with their own energy, personality, creative potential, and a development vector. However, within the framework of this study, it is proposed to expand this concept and look at all the models as living organisms that are filled with living people and living relationships between them.
Another issue is that all the previous models of cooperation were not ready to consider the interests of the people in the group, and subordinated everyone to a single goal, turning either into a bureaucracy or soulless machines. The idea that each of the above organizational structures is the next step in the development of the systems of cooperation between people and, being a living organism itself, goes through the same stages of evolution as all living things on the planet is close to the author. In order to understand the logic of these structures development and their transformation of one into another, it is necessary to take a closer look at the theory of evolution, as well as at genetic algorithms. It is these processes that describe as fully as possible the direction of life development as of today and the patterns according to which this development occurs.
1.2. Evolutionary Theory and Genetic Algorithms
Biological evolution (from Lat. Evolutio – “deployment”) is a natural process of development of living nature, accompanied by changes in the genetic composition of populations, adaptations, formation and extinction of species, transformation of ecosystems and the biosphere as a whole.
Charles Darwin was the first to formulate the theory of evolution by natural selection in his work On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life. He proved that variability and heredity are common properties of all organisms. Due to intensive reproduction, organisms create a sufficient amount of raw material for the selection of the “best” by destroying (eliminating) the “worst”. Moreover, natural selection functions in the presence of two factors — the intensity of reproduction and the struggle for existence. The struggle for existence inevitably follows from the high speed with which organisms increase their numbers. Further, Ch. Darwin suggests that since more individuals are produced than can survive, there must inevitably be a struggle for existence, either between individuals of the same species, or between individuals of different species, or with physical living conditions. Let us consider each type of struggle separately.
Interspecies struggle means a competition for survival between individuals of different species. It has a complex nature and manifests itself in the following types of harmful and beneficial relationships:
a) competition means any antagonistic relationship associated with the struggle for existence, for domination, for food, space, and other resources between organisms, species, or populations of species that need the same resources;
b) predation means a phenomenon, where one organism feeds on the organs and tissues of another, while no symbiotic relationship is observed. It is worth noting that killing the victim is optional;
c) parasitism means a form of symbiosis, where one organism (the parasite) uses another one (the host) as a source of food and/or habitat, while imposing (partially or completely) the regulation of its relations with the external environment upon the host. There are also an obligate form of parasitism, when the parasite cannot exist without the host (e.g., viruses are a typical example), and an optional form of parasitism (e.g., lice, fleas, parasitic worms, etc.);
d) commensalism means relations, where one species, without damage or benefit to itself, contributes to the prosperity of another species (for example, sheep and cattle spread plant seeds on their wool);
e) mutualism means relations, when two species mutually support each other (for example, insects and birds pollinate flowers; cereals and legumes contribute to the growth of each other in grass mixtures).
Intraspecific struggle includes the relationship between individuals of the same species with similar needs for food and territory. It is of the most acute character, since representatives of one species, especially one population, require the same conditions for life and reproduction of the offspring. For example, red cockroaches completely displace black ones, a gray rat displaces a black one, a European bee displaces an Australian one. Competitive intraspecific relationships are widely known everywhere. Birds of the same species compete over nesting sites. Males of many species of mammals and birds enter into a struggle with each other for the possession of a female during the mating season. An excessive increase in the population size exacerbates the struggle for food, therefore, for example, cannibalism, i.e. eating individuals of one’s own species, is widespread among fish. In the process of evolution, many animals have developed certain adaptations that help them avoid competition with other individuals of their species, e.g. marking the boundaries of their site, life in herds, and threatening postures.
Fight against unfavorable environmental conditions. A huge number of plants are destroyed almost every year by late frosts, droughts, and sharp climatic fluctuations. The mass of seeds is carried by the wind into unfavorable conditions and perishes. Many animals die during severe winters with little snow. With a lack of oxygen in the water, fish are killed. The result of this struggle is the survival of individuals with the most favorable hereditary changes for the given living conditions. For example, desert plants have long roots and small leaves.
All of the above types of struggle for existence lead to the extermination of a huge number of individuals or to the impossibility of leaving offspring. As a result of natural selection, individuals who are most adapted to the environmental conditions in which this species lives, survive. At the same time, there are no organic forms absolutely perfectly adapted to the conditions of their life in nature. This is impossible given the variability of the environment. Having become of no use, organs that were originally formed under the influence of natural selection, can show great variability under the influence of new environmental factors. When the conditions that formed this sign alter, it may turn out that what was useful will become harmful. Therefore, the idea of relative expediency in organic nature arises. The evolutionary process is always adaptive. The polar bear can serve as an example of survival by natural selection. Under the conditions of low temperatures in the Far North, he has formed a special wool with hollow hairs that have high thermal insulation properties. The soles of their feet are lined with wool to prevent slipping on the ice and freezing. There is a swimming membrane between the toes, and the front of the paws is trimmed with stiff bristles. Big claws can hold even really strong prey. This is a necessary and sufficient condition for survival. Individuals with other mutations simply did not survive. They could not stand the harsh climatic conditions, competition with each other, and competition with other species.
However, in conditions of continuously fluctuating environmental parameters, adaptive mechanisms are not enough. Nature has provided for another way to adapt to external conditions, namely, generational change. This mechanism guarantees the survival of the species. An organism must be born, master the living space, bring in something new that is conducive to survival in the development of the living space, reproduce offspring, transfer this new acquisition to them, help them get used to the living space and die itself. Thus, the key idea of survival is that organisms must be in a state of constant adaptation to the pulsating external conditions, acquiring some mutations and passing them on by inheritance, thereby fixing effective survival mechanisms in the genetic code.
In the process of research, Ch. Darwin noticed and made another interesting practical conclusion, which is also applicable for the world of business: natural selection can be supplemented by artificial selection. In his work, he described the process of creating new breeds and varieties of cultivated plants with properties and traits over a number of generations tha are valuable to humans. As a result, artificial selection has received an important practical application, when breeders set a task and carry out selection according to several criteria, breeding plant cultures and animal breeds with given properties and characteristics. As one of the examples, Ch. Darwin speaks of farmers in Virginia whose pigs were all black. When asked why, they informed him that the pigs were eating dye roots (Lachnanthes), which caused their bones to turn pink and all but the black varieties lost their hooves. And one of the farmers added: “In each litter we select black piglets for raising, as only they have the undoubted opportunity to survive.” Gradually, this theory developed to stimulate further dynamic development of the science of selection, the theory of mutations, the theory of gene structure, and the molecular basis of heredity. Breeders obtain the necessary properties through targeted selection of starting material for breeding, hybridization, mass and individual artificial selection. For instance, when breeding animals, breeds with high productivity, vitality, resistance to diseases, and adverse environmental conditions are developed.
An amazing and expensive cat breed called the Savannah can be mentioned as an example of targeted breeding. Being a home variant of the wild serval, the savannah was bred in the 1980s. Wild cats have always been popular with the elite, and in order to protect the true cheetahs and leopards, breeders have created an alternative. The animal looks formidable and dangerous, but in fact it is affectionate and sociable. The first savannah was introduced to the world in 1986 by the Bengal breeder J. Frank. It was the result of crossing a true serval male with a domestic Siamese cat. And in 2001, the breed was officially recognized and registered.
Darwin’s theory has been criticized many times, but the idea that life developed rather than was created in a “ready-made” form does not raise doubts among the overwhelming number of scientists. One of the practical conclusions from the theory of evolution was the emergence of genetic algorithms proposed by
J. Holland in 1975. Genetic algorithms will be very useful to us for using within the framework of the paradigm proposed by the author, and their application will be discussed below.
Genetic algorithms are adaptive search-based techniques that are used to solve optimization problems. They make use of both an analogue of genetic inheritance mechanism and an analogue of natural selection, at the same time preserving biological terminology in a simplified form and basic concepts of linear algebra. The first genetic algorithm scheme was proposed by J. Holland at the University of Michigan in 1975. And Ch. Darwin’s Theory of Evolution along with the studies of L. J. Fogel, A. J. Owens, and M. J. Walsh on the evolution of simple automata intended to predict symbols in digital sequences served as the premises thereto. The new algorithm was named Holland’s reproductive plan and was later actively used as a basic algorithm in evolutionary computations. Holland’s ideas were developed by his students K. De Jong from George Mason University in Virginia and D. Goldberg from the Illinois Genetic Algorithms Laboratory. Due to them, a classical genetic algorithm was created, all operators were described and the behavior of the test functions group was investigated. It was Goldberg’s algorithm that was called the “genetic algorithm”. To understand the essence of genetic algorithms and the opportunities of their application in business, it is worth dwelling in a little more detail on the stages of this model.
Phase 1. Creation of a new population.
In the first phase, an initial population is created. Requirements for the quality of the population according to the given parameters are not critical, since in the end the algorithm will correct this problem. The most important thing is that the population should conform to the “format” and be fit for reproduction.
Phase 2. Reproduction.
It is important that the descendant (child) should be able to inherit the parents’ traits. In this case, all members of the population reproduce, and not only the survivors. Otherwise, one alpha male will stand out, whose genes will supersede all the others, and this is fundamentally unacceptable.
Phase 3. Mutations.
Mutations are similar to reproduction. A certain number of individuals are selected out of the mutants and modified in accordance with predetermined operations.
Phase 4. Selection.
At this stage, the most important process starts. The experimenter selects from the population the proportion of those who will “go further.” The proportion of those who “survived” the selection is determined in advance as a preset parameter. Then the cycle is repeated from the beginning. If the result is not satisfactory, these steps are repeated until the result becomes satisfying or until one of the following conditions is fulfilled: either the number of generations (cycles) reaches a pre-selected maximum, or the time allotted for mutation gets exhausted.
Genetic algorithms are referred to as soft computing. The term “soft computing” was introduced by L. Zadeh in 1994. This concept brings together such areas as fuzzy logic, neural networks, probabilistic reasoning, trust networks, and evolutionary algorithms, which complement each other and are used in various combinations or independently to create hybrid intelligent systems.
To put it simply, a genetic algorithm is a method of item-by-item examination within the available set for selection of only those solutions that meet the given parameters. The solution of the task to find the shortest path from point A to point B can serve as an example here. First, you need to build any possible paths from point A to point B, look for all possible options, shift existing route points, add and remove points, through which the route passes, i.e. create the maximum number of options. Then, to choose the shortest path, you need to calculate the lengths of the routes and compare them. In the process of searching, we discard some of the longest routes, compare the remaining ones, and in the end a single route, i.e. the shortest one, is left. Only practice can show which approach will be correct in the context of a specific task.
1.3. Evolutionary Processes in the World of Business
The world is in constant motion, but fluctuations occur in a very limited framework. For example, the oxygen content in the air is on average about 21%, but slight deviations are possible. However, a fall below 18% can become critical not only for humans, but for all living things on the planet. Any individual on the Earth is a genetically stable organism, that is to say it is adapted only to certain conditions of existence that have their boundaries. To preserve life on the planet, there is an ongoing process of organisms adaptation to the changing environmental conditions, requiring a higher rate of change in bioorganisms than the rate of change in environmental conditions. Life follows the path of development of living beings with predetermined, genetically determined properties, with certain qualities of survival and with a relatively short cycle of existence. The biological goal of the life of any individual is to be born, to master the living space, to bring something new to the process of mastering the living space, conducive to survival, to reproduce the offspring, to transfer this new acquisition to them, to help them get used to the living space, and to die itself. Through death, life on the planet adapts to changes in the environment. The biological meaning of the death of individuals is the entire species existence continuation.
The same is happening in the world of business. A market economy is characterized by periods of predominantly extensive and predominantly intensive types of economic growth. This alternation is primarily based upon the cyclical nature of the economic movement, namely, continuous fluctuations of the market economy, when the growth of production is replaced by a decline, and an increase in business activity is followed by a decrease. In the economic literature, cycles of varying duration have been named after their researchers. Thus, cycles lasting 3–4 years are called Kitchin cycles, 10-year cycles bear the name of Juglar cycles or Marx cycles,
15-20-year cycles are Kuznets cycles, while 40-60-year cycles are named Kondratieff cycles. Cyclicality is characterized by periodic ups and downs in market conditions. Periods of increased economic activity are characterized by predominantly extensive development, while periods of decline in economic activity are characterized by the onset of predominantly intensive development. Consequently, a cycle is a constant dynamic characteristic of the market economy. It is a form of movement and development of the market economy. Located in a pulsating environment, companies try to survive, master the living space, bring something new to the mechanisms of development — and thus adapt to the existing market.
The history of the Coca-Cola product range can be cited as a vivid example of business adaptation to the changing conditions of the surrounding world. In the 1960s, it was a ‘black sweet drink’ producing firm. In the process of development, the company restructured its assortment every 5–7 years, reducing the sugar content, altering the color, adding carbonated and degassed water, iced tea, energy drinks, and juices to its product range. As a result, today the ‘black sweet drink’ accounts for only about 15% of Coca-Cola’s assortment. Another example is SEMCO, a Brazilian industrial equipment manufacturer. The company has introduced a self-management regime. SEMCO’s 3,000 employees determine their working hours and salaries on their own. Workers hire their own supervisors and evaluate their performance. There are hammocks hanging around the plant so people can take a nap at lunchtime. If an office worker comes to work on Saturday, then on Monday they can spend the first half of the day at the beach. The company has neither a rigid organizational structure, nor five-year plans, set of corporate values, or dress code. There are no hard-copy rules or program memoranda, except for the comic-printed Survival Manual for new employees, which summarizes the unusual customs of SEMCO. Tochka Bank is an example from the Russian market. It is a multi-brand bank operating on the basis of Otkritie FC Bank and QIWI Bank, which implements holacracy, i.e. an organization management system where powers and responsibility for decision-making are distributed throughout the entire holarchy of self-organizing teams rather than being vested in a management hierarchy. Holacracy distinguishes between roles and the people who fill them. There are obligations. And there is transparency in decision-making.
The key goals of these companies in choosing such a self-organization structure are to survive and succeed. Entrepreneurs heading these organizations realized that the environment is changing rapidly and today there is a situation where the rate of learning and adaptation is lower than the rate at which new technologies and new opportunities appear. Previously operating principles of doing business, such as rational organization of labor, formal organizational structures, and differentiation of managerial and executive functions, can no longer fully play their roles. Further on, the “function primacy over the organ” evolutionary mechanism worked. It means that when a living organism faces the task of searching for new forms of adaptation to environmental conditions due to the changed living conditions, first there is a change in the forms of behavior in the environment, and then, as a consequence, morphological changes take place, that is, corresponding organs appear, which can most adequately perform the relevant functions.
The “Teal Concept” in business is not just an adjustment of functions, but a change in the internal structure. This is the transformation of a caterpillar into a butterfly. That is to say, these companies can be examples of not just adaptation, but examples of the next stage in the evolution. As mentioned earlier, this type of organizational structure (Teal Structures) incorporates the strengths of previous systems, introducing new characteristics into them. The companies have chosen to serve the customer constructively, and profit is the result of the effective teamwork. The role of a leader in these companies is also completely different — it is an agent of change, a mentor. In such organizations, there is a conscious cultivation of an environment conducive to the disclosure of the best human qualities and the realization of the potential of each employee.
There exist many examples of companies similar to SEMCO and Tochka already. Study of the issue has shown that such structures have existed since the mid-1950s and have already accumulated significant experience of applying such a system of cooperation. Companies operate in various fields, from non-profit structures to industrial and IT companies.
Thus, new organizational structures are an inevitable response to environmental changes. Each subsequent stage in the development of organizational structures demonstrates greater flexibility, greater adaptability and expands the capabilities of these structures. Thus, in order to reach new heights in business, it is necessary to be at the forefront of evolutionary development. However, development is always a reaction to environmental changes, and it is unlikely that it will be possible to change the company from the inside. Evolutionary mechanisms work when adaptation is required. This means that in order to grow a new generation of companies, it is necessary not only to learn how to create companies, but also to learn how to create an environment that can naturally enable new lifeforms to grow.
1.4. Formation of Ecosystems
For business, the natural environment, i.e. its ecosystem, is the market and society. However, like in agriculture, people cannot be content with the existing climate conditions and rely on the weather; they are always looking for an opportunity not only to preserve the harvest from adverse natural phenomena, such as drought, frost, or hail, but also to increase it. In order to do this, special properties of plants are cultivated, and greenhouse complexes are created, where conditions are provided for plants to form properties useful for humans, for example, increased productivity. In the business world, this work is also carried out.
They have been working on the creation of business incubators in different countries for many years with varying degrees of efficiency. A striking example of such an ecosystem is the Silicon Valley — the habitat of high-tech companies. The territory is located in the southern part of the San Francisco Peninsula in California and stretches from San Mateo and Palo Alto in the Peninsula to Fremont in the East Bay region, through San Jose, centered around Sunnyvale, though no such geographical name exists on official maps. San Jose is sometimes unofficially called the capital of the Valley. The San Francisco Bay Area has long been a prime location for the development and research of the U.S. Navy’s structures. One of the milestones in the development of the Valley was the Stanford Industrial Park creation. After World War II, the number of students at Stanford University increased dramatically, and the need for additional funds arose. The university owned a large plot of the land that it wasn’t entitled to sell in accordance with the will of L. Stanford, the university founder. In this situation, Prof. F. Terman, the Dean of the School of Engineering, proposed to lease the land on a long-term basis for use as an office park. Thus, the educational institution began to receive income from the land rent, and companies could use leasing instruments. The introduction of restrictions on such rent for high-tech companies allowed to solve the second main problem of the university — Stanford graduates were now able to find work in the immediate vicinity of the alma mater. At the same time, the companies’ problems related to the search for highly qualified specialists were also resolved. Terman advised his students to start up companies right near the university. He mentored Hewlett and Packard, who founded Hewlett-Packard (HP) in 1939, and HP is symbolically deemed the first Silicon Valley company. At the moment, Silicon Valley is one of the three largest US technology centers in terms of the number of people employed in the high-tech sector. There are many platforms for the development of new projects, where science-intensive startups are born and venture capital investors interact. Silicon Valley proceeds are well above the US average. It also houses headquarters of many tech companies, which were included in Fortune 1000 list at this or that period of time.
Many countries are attempting to repeat the success of Silicon Valley, but this task is not an easy one, since they usually see only the facade and set the main goal of obtaining serious funding. However, this is only a cursory glance, and it is worth taking a closer look at this phenomenon.
In the author’s opinion, the Silicon Valley model has been analysied very thoroughly in the book The Rainforest by V. Hwang and G. Horowitt. These authors consider the reasons for successful and unsuccessful attempts to build innovative systems, investigate the causes and try to formulate models that will recreate the conditions for successful implementation of business projects in the field of innovation. The title Rainforest is a powerful metaphor. Perhaps, for a Russian person, more understandable name would be “Taiga” (dense marshy forest in Siberia) or “Thicket”. The key idea of the metaphor is that for innovators to emerge and for innovations themselves to grow, it is not the beds in the garden that are needed, but conditions that resemble the rainforest ecosystem, where there are giants and dwarfs, weeds and useful plants coexisting, i.e. where there is great biodiversity. In this ecosystem, everything is naturally balanced: to get through to the sun, you need real abilities and great efforts, there is no place for imitation. A large number of attempts to create a system similar to Silicon Valley are being made across the world, but all of them cannot yet be compared with the original.
You cannot create a real rainforest simply by planting more trees. The answer is rooted in biology rather than in engineering. To understand Silicon Valley, one needs to think of people as of a single biological system rather than as of a sum of individual components. In order for an ecosystem to start living and breathing, it is necessary to provide the right environmental conditions and then allow the seedlings to rise and grow on their own. Biological systems emerge by evolution rather than by artificial design. Experimentation, repeated corrections and repairs of what is broken are at the core of the evolution. Mutation and natural selection through trial and error ultimately lead species to thrive in a complex ecosystem.
A Rainforest is a human ecosystem in which human creativity, business acumen, scientific discovery, investment capital and other elements come together in a special recipe that nurtures budding ideas so they can grow into flourishing and sustainable enterprises. Innovative ecosystems are not just similar to biological systems — they actually are. Talents, ideas, and capital are nutrients that flow through this biological system. Measuring the speed at which these nutrients move can provide a tool for monitoring the dynamics of the health status of the innovation ecosystem. In rainforests, the most promising life forms emerge in unpredictable ways in fertile media. In innovation systems, there is no need to try to breathe life into individual innovations, but it is critical to try to design and shape the proper environment that cultivates such innovations to be born and thrive. In the world of common business, an employee who decides to manufacture a part non-compliant with the requirements of the regulations will be fired. However, in a Rainforest, this “weed” error may turn out to be the most valuable species for the entire ecosystem. If you think about it, companies like Google and Tesla were difficult to distinguish from “weeds” in the beginning.
A Rainforest helps innovators network in the same way that living organisms network in natural biological systems. This allows the Rainforest to discover new recipes for combining and recombining ideas, talent, and capital. The Rainforest creates conditions for emergence of human systems that encourage evolutionary development. To ensure efficiency, there are Rules in the Rainforest, i.e. a set of unwritten norms of behavior that reduce the distance between people. Within the framework of this work, I would like to highlight one of the axioms of the Rainforest: “The instincts that once helped our ancestors survive are hurting our ability to maximize innovation today.” Behavioral expert J. Crawford put it succinctly: “Attention has a negative deviation. It is far more rewarding to spot a tiger lurking behind a tree than delicious fruit on its branches. As a result, on the whole, we unite more in order to avoid losses than to seek benefits. Mistrust is easier than trust”.
Trust is one of the foundations of the Rainforest ecosystem. The Rainforest flourishes only when people are motivated by reasons that elevate them above quid pro quo exchanges. This type of behavior suggests the ability of individuals to rise above personal short-term interests and focus on the prospect of achieving joint long-term benefits.
Key factors that give strength to human innovation ecosystems are: diversity of talent; trust that overcomes social barriers; long-term motivation that rises above short-term rationality; and social norms that give individuals the freedom to choose partners for cooperation. This is the unique culture of the Rainforest. This is the invisible difference between Silicon Valley and other innovation clusters — the presence of a special culture, special unwritten rules, and a special morality in relationships between people. Planting trees is not that difficult, but replicating a culture that provides conditions beneficial to flourishing is a task of a completely different complexity level. The Silicon Valley Rainforest was born out of the faith and strong position in the new lands in the American West. This process was natural. It can be described this way: belief — attitude — behavior. However, if we want to create a new Rainforest, we must restart this process. We have to artificially replicate systems that usually appear naturally. Restarting can be described like this: behavior — attitude — belief. We will follow the principle described by Shakespeare in Hamlet: “To flaming youth let virtue be as wax, And melt in her own fire.” When creating a Rainforest, first it’s necessary to start shaping the external behavior of the participants and future innovators, while principles, values, and identity can develop gradually.
However, the idea of the Rainforest has continuation in the modern world. We see some companies become Rainforests by themselves and start shaping their own ecosystem. For example, Sberbank, as part of its transformation strategy, is gradually increasing its non-banking sector services, such as telecom, medicine, insurance, and marketplaces. Another example is Yandex, which has turned from an Internet search engine into a large multinational corporation and a real multi-portal with lots of web services, e.g., mapping, multimedia, market search, advertising, statistical, and others. This is a vivid indicator not only of business adaptation, but also of evolutionary development, which emphasizes the truly live nature of business.
1.5. Corporate Lifecycles
The hypothesis proposed in the book considers companies as living organisms and is supported by the world famous Doctor I. Adizes. Over the past 35 years, Dr. Adizes, advising commercial organizations and states, managed to create not just a theory, but a whole methodology, a philosophy of business. It is applied in large companies such as Coca-Cola, Bank of America, Volvo, and Visa Group. The methodology is based on the fundamental law that all organizations, like living organisms, go through similar stages of the lifecycle and demonstrate predictable and recurrent patterns of behavior. At each new stage of development, each organization faces a unique set of challenges and complexities. The success of an organization is determined by the ability of managers to control the transition from one stage to the next.
According to the Adizes model, ten regular successive stages can be distinguished in the lifecycle of a company.
The courtship stage is the first stage in the development of a company. At this stage, it exists exclusively in the form of an idea formed in the head of the would-be founder. This period of enterprise evolution is based on dreams and opportunities, and the main task of its head is to create and develop a deep commitment to the idea. The higher the risk and uncertainty of the project, the stronger should be the belief in the result. Hired managers at this stage of the company’s development will be useless.
Natural problems and anomalies at the courtship stage include:
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