THE BLOG
07/15/2013 10:43 am ET Updated Sep 14, 2013

4 Lessons From Economic Selection

Where does evolution by selection work in business? Some products prosper, but most die young. Why? It may have little to do with product, and more to do with the family it is born into. Individuals' prospects are strongly influenced by their parents and heritage -- by nature and nurture. It is the same with products.

Products live in family, both vertically (over time) and horizontally (at the same time). Products exist within generations. All products eventually die, but the most successful ones live long enough to produce at least one 'offspring' -- a next generation product or a same-generation variant. Product parentage matters. Products born with a good brand or within a well-organized and highly regarded firm are much more likely to last. But even more important than brand and company are the product's immediate progenitors. The most successful products will generate many same-generation variants and a chain of next generation products. For every product that survives, however, there will be many that never made it off the drawing board, never survived the test market, died shortly after launch, or never produced any offspring.

Successful products will be able to say -- not one of our progenitors died in infancy. But ancestors are rare. Most products die before they reproduce. Some $160 billion is spent each year on research and development, but only 5 percent of that money generates a product or service. And for the few products that are born, there is a high death rate in the early months and years.

For a technology, a unit of economic information, or a product to succeed, it must beat heavy odds against selection, it must have many offspring, and it must gain currency -- intellectual or monetary.

Yet what is success for the owners of a technology or a product? Surely, it is to make the largest possible amount of cash from it. This requires making the product or technology proprietary to the owners. This also tends to produce more variation, more experimentation, more downstream products, more winners and many more losers. Recognition of intellectual property rights, or the creation of new firms, don't restrict the evolution of economic information. Rather, they speed up that evolution -- patents and new ventures encourage variation to justify or avoid that intellectual property, an endless stream of innovation, where the more differentiation, the more customers attracted, the more highly useful products evolved, and the more surplus cash created. By creating their own distinctive ways of working and culture, new firms, as well as new products, add to the richness of life. Proliferation of products and ventures accelerate economic evolution.

Four Lessons of Economic Selection

First, products will be stronger -- more likely to survive and reproduce -- if they have emerged from a struggle for life, from substantial competition. Socialists, governments, and most big companies find it impossible to grasp this truth. Without competition, economic selection can do nothing. Innovation comes from the new, the heretics, the outcasts, the outliers, the poor and the dispossessed, as long as they are also ambitious. The competitive mind-set requires insecurity and an open mind. It requires entrepreneurs. It requires struggle, danger, and frequent death.

This does not necessarily mean that you should launch a multitude of products. But it does mean that you should consider and test a large number, so that those that do emerge have faced ferocious competition.

For some firms and markets, putting out a lot of products and letting the market decide which survive is a sound procedure. When Sony introduced the Walkman, it flooded the market with hundreds of variants, letting the market do the culling. Capital One is a very successful credit card firm that regularly and mercilessly kills off the majority that bomb. It relies heavily on direct mailing to attract new customers, putting out perhaps 300 different 'products' -- varying the letter, the color of the envelope, the position of the address, and so on. The response rates from the test markets decide which mailing will become the standard one. Today it is easy to do cheap split tests using Google - the amount of experimentation has gone up enormously.

But there is a long history to competition. One milestone was in the 1930s, when Procter & Gamble, then as now one of the world's best consumer goods firms, took the revolutionary and apparently wasteful step of allowing direct competition between its own brands. This provided challenges that often didn't exist elsewhere in the marketplace. Brands and products couldn't rest on their laurels. Although this formula demonstrably worked, it took almost 30 years for rival firms to copy P&G. Though it is our best route to success, we still hate competition. It's so nasty, so brutal, and so unpredictable.

The second lesson is that new product variants will arrive sooner or later, whether or not you introduce them. Natural selection does not care which organism mutates or does not mutate, lives or dies, has sex or fails to reproduce. Economic selection couldn't care a fig who owns the new product; it just wants to see it arrive and get tested in the forge of competition. The market doesn't care whether Bic or Schick or Gillette is the market leader in disposal razors, but it does want to see cheaper and better razors emerge. The market doesn't care whether the big brewers or new specialists supply light beer, imported beer, microbrew beer, monastery beer, or fruit beer -- but it does want to see eruptions of product variants, so that the new ideas that survive enrich the ecosystem.

The third lesson, therefore, is to scatter new breeds around your core product. Fill up the potential product spaces so that newcomers can't move into these niches. You might not think that a new type of product -- cherry cola, for example, light wine, or healthy chocolate -- has much chance of success. Still, have a go and let the market decide. Reinvent your product before somebody else does.

Online shopping is a great illustration of where leading firms have often neglected to claim all the niche or potential niches. The leaders in most 'real world' businesses have failed to become the leaders in the same markets online. Often there is the fear of the unknown, and the fear of cannibalization. Had Barnes & Noble, the leader in real-world bookselling, embraced the internet at the outset, the word 'Amazon' would just connote a large river or a nation of female warriors. Now Amazon has a bigger and more profitable business than the erstwhile leader, having filled up a very large number of niches in online retailing through simplifying the shopping experience and providing good value and service.

The fourth and final lesson is that product and service improvement can and should always be accelerated. Competitive selection drives faster evolution, and evolution proceeds not just through new variants, but also through new and better versions of the old product. Encourage failure -- it's intrinsic to the process.

Evolution is slow or non-existent unless there is competition, unless the cycle of struggle for life, selection, improvement, and profligate variation is allowed to operate. But evolution can be sped up -- by you or somebody else.

Side with competition. Side with innovation. Side with struggle and natural selection. You don't really have much choice, if you want to survive. As Darwin said, there is grandeur in this death-infested view of life; endless forms most wonderful emerge from the struggle for existence. Or as Dr. Johnson almost said, when you are tired of competition, you are tired of life.