Previously, we discussed that the next wave of growth might come in the healthcare sector enabled by capital, living standards, tech, and knowledge accumulated at the previous stage.
This article will look at forces that shift the paradigm from growth to resilience, making the business landscape increasingly granular. The resilience and granularity are not something investors (and, frankly, anyone in business) are used to dealing with. Here we elaborate on whether we should adapt our approach to investing.
In our thinking, we use two concepts that support each other:
A modern organisational theory argues that the next step in organisation development after a traditional meritocratic corporation is an organisation that will value and nurture people's motives to coordinate around purposeful tasks. More can be read here, and Managing the Company of the Future is an excellent online course tapping into the topic.
The other one is biomimicry. Although the original concept is about replicating what works in nature, we use it the other way around – observing natural patterns, we guess where the economy will land. After all, we are humans and tend to follow the laws of nature when we act collectively.
The Principle of Succession
Let me start with an extract from a brilliant Paul Hawken’s book - The Ecology of Commerce.
‘.. aggressive and invasive weeds like thistle and broom take over bare ground and spread quickly, establishing temporary primacy. These opportunistic species are suited to what are sometimes called “immature” systems. The plants compete for sunlight to capture the maximum available energy while covering the raw earth as quickly as possible. In such a system, energy is wasted, diversity is minimal, and the plants are generally of lower quality and usefulness. Their life cycles are short, being mostly annuals.’
‘Pioneer systems create the foundation for more mature ecosystems because they stabilize the soil, check erosion, bring trace elements up from the subsoil, and prevent further deterioration of the area. Once a pioneer state is established, the initial colonizers are succeeded by increasingly complex organisms and relationships. This process continues until the most adapted system the setting will allow is reached.’
Doesn’t it resemble the oil and gas industry with its boom-and-bust cycles? Dominated by major national and international companies that scale up exploration and development budgets in times of high oil prices and shed staff and divest when the economy goes through the trough. Divesting gives way to smaller private companies using radical innovations to slash production costs and delay economic cut-off. Smaller companies can do that not bound by a bureaucracy and overheads while having access to the infrastructure created by majors during the previous cycle of development.
‘An ecosystem evolves from pioneering, immature states that emphasise growth, through several intermediate stages, until it evolves into mature systems that are highly efficient and resource-conserving. Mature, climax systems comprise an association of organisms that reach a state of equilibrium which leaves the habitat largely unchanged from year to year.’
Through their complex interchanges of nutrients, gases, and information, mature systems create the greatest amount of biomass with the least amount of resources.’
Applying this concept to business, we see a move away from the growth-driven economy with the a-winner-takes-it-all approach to resilient cooperation. This example also implies that resilient systems evolve from continuous trial-and-error experimentation on a thick layer of capital.
In other words, I believe that closing the circular economy loop cannot be achieved by design or regulation. It has to evolve nurtured in the abundance of financial capital, infrastructure and knowledge created earlier. However, what regulation can do is putting a lid on available energy sources so that those iterations happen faster. That is what carbon tax legislation is all about. Though it is likely to cause geopolitical disturbances, it redistributes fossil fuel rent to subsidise the alternative energy economy, but this is a different story.
It Gets Faster Until It Stops
The by-side of technological progress is that it makes evolution in economic and social domains faster. Exponentially faster. And most people think it is going to be yet faster.
‘A [recent] study by McKinsey found that the average life-span of companies listed in Standard & Poor’s 500 was 61 years in 1958. Today, it is less than 18 years. McKinsey believes that, in 2027, 75% of the companies currently quoted on the S&P 500 will have disappeared.’
In nature, the speed of growth slows down as ecosystems become more sophisticated and approach the equilibrium state.
With growing numbers of producers, service providers and consumers and the ever-increasing speed of transactions, we might see the relative growth slowing down. That is not necessarily a bad thing for the economy. A rainforest has zero growth rate compared to triple-digit growth of weed biomass conquering bare rock, but it serves as home to many species.
To appreciate the accumulation of true capital and learn how to profit from it, we need to rethink how we measure success and discontinue using simplistic profit equations that do not account for the creation/destruction of true capital. It may take decades, but I am sure in the future, we will be using Return on True Capital Employed (ROTCE) instead of outdated ROCE metrics.
Work for Value
Automation of standard jobs changes relationships between humans at the enterprise. As jobs in scheduling, payments, process control, quality control and shipping become standardised, unmanned and outsourced classical management becomes redundant.
Fewer employees at the enterprise do not mean fewer jobs in the economy; consider the rain forest example. Certainly not less remuneration. On the contrary, shrinking organisational structures provide an opportunity for a shift in compensation schemes. Co-owning a business or working for a direct share of profit, not salary, may become a new norm.
Skills vs Jobs
As a corporation's life is getting shorter, the average term of employment is likely to shrink. Organisations likely to become resilient to external shocks, expanding and contracting as the environment dictates. Organisations will need to have permeable walls to allow required skills to come in and out in sync with demand. Just like an Uber driver who, having finished one ride, immediately picks the next order.
That, however, requires a highly liquid market, which is likely to evolve as the market for skills, not jobs. There is no time for hiring, onboarding, training, dealing with personal issues, and painful negotiations to lay off people.
That is likely to stay outside of corporation and create a niche economy for smaller businesses engaged in targeted modular education, career development, psychology of work and certification of skills.
The latter is likely to get more critical than ever. Perhaps we will soon see more complex ratings of employees’ skills at job boards and social platforms like LinkedIn. Many legal professionals, doctors, software developers compete for customers on professional platforms using ratings.
AI will undoubtedly have a role here. Instead of suggesting annoying ads, AI and algorithms could be fed with a project roadmap and timeline to search the market for skills available within the dates and budget. Like in a game when you set up a team made of different characters with different powers.
The Great Unbundling?
And if we leap just a bit further, the next thing to watch out for is the emergence of platforms that will wrap up talents and skills around bare entrepreneurial opportunities. No owner. Just a collective effort to create an output with results distributed between participants. I know that may sound socialistic, but at the very core, it does make economic sense — a pure exchange of capital, skills and ideas for a share of future profits.
Early shoots are appearing with Quirky and alike but still at an embryonic stage.
That has the potential to unbundle traditional corporation so that all the mental effort goes into R&D and innovation while everything else around gets executed through specialist platforms.
Ok, that was a vision. It may not translate into immediate ideas for a portfolio. Broad conclusions are
Though big corporations are here to stay, the exciting part will be to watch beyond and at what their services enable.
The life of an average investor is likely to get more complicated as he/she will grapple with increased granularity.
Fund managers’ job will get more rewarding as there will be plenty of opportunities to 'beat the market' with diverse investing opportunities.
The concept of profit and the organisation's purpose is likely to evolve a lot beyond "Greed is Good".
Do not hesitate to share your thoughts.
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The article utilizes data and information from public sources. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.