THE BLOG

Business Is Fractal

07/01/2013 08:47 pm ET | Updated Aug 31, 2013

Do you know someone who has "risen without trace" -- who is successful, yet you can't work out why? When I was a callow consultant, my first project was for an Irish conglomerate that had a supermarket chain. The manager running it was something of a figure of fun, because he could never explain what he was doing -- his discourse was long-winded and obscure. "Ah," the group CEO said, when told that the manager had ended a strike, "he bored them back to work!" And yet, this inarticulate manager always made his numbers and they always went up.

I'll come to his secret in a minute. First, here's a very useful concept. The celebrated mathematician and chaos theorist Benoit Mandelbrot coined the word "fractal" to describe phenomena that are very similar to each other, yet never identical -- coastlines, trees, clouds, cotton or stock market prices, earthquakes, petals. Patterns are endlessly repeated, yet also with endless, unpredictable variety. "I think that I would never see, a thing as lovely as a tree." Each tree is different, yet all trees are the same. It takes a mathematician to see the rich and beautiful patterns within that variety. When working in IBM's pure research department, he used its most powerful new computers to analyze cotton price data. He found that there were patterns for daily and monthly and annual price changes which, when drawn on graphs of different scales, matched each other near-perfectly. Even the degree of variation had remained constant over sixty years that included two world wars and a depression. The squiggles were random, yet eerily alike. In a similar vein, physicist Richard Feynman remarked, "once you've seen one electron, you've seen 'em all".

Business is like this -- it is fractal. No situation is quite like another, but within any particular type of business there are a small number of key factors that always resemble each other. Business outcomes are utterly unpredictable, which is why the quest for a rational science of management is naive and futile. And yet, the same kind of things happens over and over again. There are always recurring patterns that are worth studying. The fact that business is fractal is the best justification for the case-study method used in some business schools. There is, however, a big "but," that undermines the whole idea of classroom knowledge -- you need to have experienced the patterns to know what might be coming. And the patterns are highly specific to different types of business, even those that appear to the outsider to be the same. A lifetime looking at coastlines will not help you study clouds and decide whether it is going to rain. An expert in cotton price movements may draw the wrong conclusions from a chart of stock prices.

A large part of the difference between successful and unsuccessful entrepreneurs and executives is the ability to recognize the fractal patterns and to make decisions accordingly. This does not require the use of data, logic, or explanations. It certainly does not require facility at spreadsheets or presentations. If you have many years' experience and track record in making good decisions in a particular industry and market, the chances are that you will continue to make good calls by recognizing patterns -- as long as you stay in the same industry and market. Your decisions may be entirely intuitive. Good decisions do not require good justifications.

This was the secret of my supermarket chief. He'd worked his way up from stacking shelves and manning the checkouts. His entire working life had been spent in the same supermarket chain and the same country. He understood his employees and what his competitors were likely to do next. He had no qualifications and the famous Irish gift of the gab had passed him by. Yet, at a deep instinctive level, he knew how to make money out of a supermarket chain and how to expand it profitably.

If someone is performing and otherwise unimpressive, leave them alone. Such managers are often overruled because they are unable to explain or rationalize their intuitive decisions. If you recognize that business is fractal, you stand a better chance of escaping the tyranny of analysis and data, which, after all, can be used by anyone intelligent and good with numbers to prove almost anything.

Realizing that business is fractal gives you important warnings and signals:

• Unless you immerse yourself in a business and have been in it for years, beware of taking bold steps against the advice of old hands, however unpersuasive they seem to you.

• Be careful when entering markets that are new yet seem "adjacent" to your existing ones -- near in terms of discipline, structure, customer base, operations or technology. As Tesco found out recently, the US grocery market is not the same as that in the UK or Europe -- repeating the expensive lesson learnt long ago by equally well run firms such as Marks & Spencer. The fractal patterns are subtly different. I learned the same unpalatable truth when I was a director of Filofax. For decades, the British management had encouraged its American subsidiary to sell in the same way and through the same stationery stores that worked in Britain and most other countries. For decades, the US managers argued that these approaches would never work. For decades, the American executives were ignored, because they could never explain why the tried-and-tested global formula wouldn't work in the US. For decades, Filofax made high profits everywhere but in America. A fractal approach would have allowed local managers to experiment with the approaches they favoured, until they found an American strategy that worked.

• Whenever you face a big decision, find the nearest equivalent situation from your experience and that of your colleagues and friends in other firms. Don't leap to conclusions. Engage in sober debate about what could happen next, based on three possibly similar situations and how events there unfolded. What could go wrong or right in a big way? What are the immediate signals indicating impending success or failure? Look for the signals the same way that a mariner would scrutinize the coastline, and intuit which way it may turn next. Favour experience and proven judgment over logic, clever strategies, and persuasive presentations.

• Once you're headed down a particular path, look for the early signs that you are on or off the expected track, just as you would when following a map or detailed directions. If the early signs deviate from what you expect, you have probably chosen the wrong fractal comparison. Don't be embarrassed to do a U-turn before you lose your shirt.

Because there are so many different types of business, where disparate rules apply, specialized businesses always have an advantage over generalized ones. A specialized unit, company, or market will tend to win over an undifferentiated one. Focus is the antidote to bigger, richer, more prestigious firms that are living on their past. Form specialized, distinctive teams, new business units, new divisions, and above all, new ventures. Most managers and owners hate to split up their company. Yet if business is fractal, and part of the skill in business is recognizing fractal patterns, a focussed company is more likely to spot the recurrent patterns and make the right responses.

And one last thing. If fractal templates are one of the great ignored variables in business success, the myth of the general manager, equally at home in any business, starts to look suspect. The idea of universal management truths looks a little less compelling. Business appears messier, less cut-and-dried. As someone who believes in simple templates and spent one whole career marketing them, I find the recognition that business is fractal rather inconvenient, a shade embarrassing. Throughout my career, I have tried to glide smoothly, perhaps even glibly, over a variety of industries, countries, technologies, and business models. It has not worked too badly. But if I had my time again, I think I would have specialized more, not just in techniques, but also in the localities and specificities of business. To understand a particular neck of the woods better than anybody else alive is a worthwhile aspiration. If you are near the start, or even in the middle, of your career, that may be something to ponder intensely.