Organisations and the laws of thermodynamics

In  Surfing the Edge of Chaos, Pascale starts to describe organisations as complex adaptive systems, rather than using the more traditional functional forms.  It's interesting that complext adaptive systems have four properties:

• composed of many agents acting in parallel
• continuously shuffling the building blocks
• subject to the second law of thermodynamics, exhibiting entropy and winding down
• has the capacity for pattern recognition

It's the third property that fascinates me - as this seems the significant step up from traditional analysis of organisational forms and strategy.  Alfred Marshall defined the maths that describe economics as a science to be compared with physics.  This used fundamentally first law principles, and worked as a theory in periods of slow market change.  However, since the technologically revolutions of the last 20th century, the first law principles seem to fall down regularly.

Enter Pascale and the era of complex adaptive systems.  The organisation and the market cannot be controlled or predicted purely by considering energy - if we invest more in X, we can defeat competitive spending in Y.  The equation becomes more complex, with the evolution of unexpected outomes and the time-based nature of the second law - the impact of energy recedes over time as entropy increases.

I wonder if there is some future business analogy to the 3rd law?

Or perhaps we have already seen it - complex adaptive systems are at risk when in equilibrium - a precursor to death.  Perhaps the regular death of major companies is an exhibition of equilibrium at absolute zero - energy exhange with the environment has declined to zero as the processes ossify and the ability to change is reduced to zero.

Post industrial scarcity and Natural Capitalism

I've been reading a Harvard Business Review article on Natural Capitalism (Lovins et al 1999), and just discovered this is also a book. The article highlights numerous ideas for a greener business environment - re-glazing that pays back cost and energy output inside two years, penny-pinching on wiring that drives up lifetime costs and energy output and innovative services/leases that can change the economic question from initial investment appraisal to total cost of ownership savings.

But the really interesting comment that struck me towards the end was "most businesses are behaving as if people were scarce and nature abundant - the conditions that fueled the first Industrial Revolution". But today's conditions are reversed - people are abundant and natural resources are becoming scarce. That's quite a philosophical challenge to the accepted business strategy norms. How does off-shoring continue to make sense with this philosophy - given the abundance of people here and the increased energy requirements of moving manufacturing overseas (and transporting finished goods back).

The (current) normal business response to a financial challenge/crisis is to cut costs - normally headcount costs and particularly in the "support functions". But if this reduces the amount of maintenance (see BP's record or New York city's bridge maintenance deferral problem), the ultimate cost (in both natural resources and financial capital) can exceed the initial savings. Lovins et al called for a broader measure of business performance - measuring and effectively using human and natural capital as well as financial capital. At least one company has taken this forward seriously - Novo Nordisk in reporting on their triple bottom line.

However, even this triple bottom line reporting is missing the intangible nature of novel ideas. It is said that "creativity, knowledge, innovation and learning now add value far more than land, labour or capital" (OU, p15). Perhaps a quadruple bottom line is needed for the learning organisation.