Bottom Up Tinkering: How Things Really Improve In Business
Life and the universe are moving toward complexity. What starts off simple and innocent becomes complex over a long enough time horizon. If you believe in Darwinian Evolution you’ll likely believe we are the common ancestor of a single cell replicating organism that eventually morphed into various multi-cellular life we see today.
“A complex system that works is invariably found to have evolved from a simple system that worked. A complex system designed from scratch never works and cannot be patched up to make it work. You have to start over with a working simple system.”
Gall’s Law - John Gall (Pediatrician)
Founded by Jeff Bezos in 1994, Amazon was originally an online bookseller started in Bezos’ garage. Having the first mover advantage (a firm's ability to be better off than its competitors as a result of being first to market in a new product category), Amazon quickly morphed into the world’s largest online retailer building a vast global distribution chain offering every conceivable product. Much of Amazon’s ethos is fast experimentation.
“One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
Jeff Bezos letter to shareholders
Today, Amazon offers Prime (a monthly subscription service), FBA (Fulfillment by Amazon) for your business’ warehousing and logistics needs, Whole Foods Market and more are some of Amazon’s successful experiments. Amazon also has a large graveyard of failed experiments. For a list of Amazon’s failed experiments link.
In business, we tend to view successful businesses and executives as possessing prescient wisdom that allowed them to take the right course of action that led to their stratospheric success. CEOs and founders have scores of tomes written about them at any bookstore. We buy these books, mining for success lessons that led them to where they are. Advice given is usually digestible aphorisms and generalized. Not the tacit kind that is difficult to communicate involving extensive experience and intuition in a specific domain.
Most post success-event analysis are tainted by Survivorship Bias (a cognitive fallacy in which you focus only on examples of successful individuals (the “survivors”) in the selection process rather than the group as a whole (including the “non-survivors). We don’t look at the other cases of objectively similar businesses and executives and surmise that they were destined for greatness if they would have had different leaders in charge. Most of the advice given by Fortune 500 CEOs and success gurus tends to be prescriptive, formulaic and cookie cutter. It doesn’t account for the subtle differences in environment and conditions each business faces that are unique to itself. What works in one environment doesn’t work at another and what works at one time doesn’t work at another, see Eugene Schwarz’s Market Sophistication.
source: https://swipefile.com/5-stages-of-market-sophistication/
Ecosystems are ultra competitive arenas. Each species faces selection pressures from environment, other species and within each species. Same holds true for businesses. We have businesses who compete in serving the same market. The Total Addressable Market (TAM refers to the total market demand for a product or service. It’s the most amount of revenue a business can possibly generate by selling their product or service in a specific market) is split when ever greater numbers of competitors enter the market. As available market share and profits are reduced, some businesses with little to live on shut their doors and close.
Like a species that survives many seasons and leaves many offspring, a business tries mightily to survive economic cycles and eventually aims to build leverage (more locations, larger facilities, expansion of products and services, acquisitions). A business that is always split testing how it does things and what it offers and using what works is using real time natural selection. Like a random mutation that offers its carrier a survival advantage, businesses that perform successful experiments are rewarded with increased profits. Big fitness payoffs.
In a market where competitors are copying product offerings and marketing strategies, innovation can lead to asymmetric market share gains. This often leads to offering customers a little more for a bit less money as our operating expenses increase and businesses compete on price. Avoid commoditization as much as possible.
Silicon Valley’s often quoted mantra “Fail Fast, Fail Often” is another side of the same coin. Most developers experiment with a version of split testing (a method of conducting controlled, randomized experiments with the goal of improving a website metric, such as clicks, form completions or purchases) when launching or updating websites. These experiments often lead to counter-intuitive findings. We think we know what the customers want but our assumptions can be costly (our theoretical income versus our current income).
Try many small experiments, use what works and keep iterating. As the competitive landscape shifts moment to moment with shifting supplies and supplier politics, new legislation, changing work force availability, evolving customer needs and pain points, we need constant experimentation to keep up. Like Amazon, our businesses too can hit massive grand slams with outsize returns by endless tinkering.