Energizing Commerce, Literally


Average lifespan of companies

    Matthew Crawford is a motorcycle mechanic with a Ph.D. in philosophy. In Shop Class as Soulcraft he explains why he quit a job at a think tank to run a repair show. He owns and operates Shockoe Moto, an independent motorcycle repair shop in Richmond, Virginia.

    Working with our hands is conducive to deep and productive reflection. He says manual workers are in touch with objective reality and must satisfy objective standards of excellence, whereas office workers spend much of their professional time managing perceptions of themselves. Touche'.

    Many scientific theories about the world began as observations by craftspeople in workshops. When physicists were running in circles trying to figure out theories of heat, mechanics were working on the steam engine. It was this group who figured out how heat, power, and pressurized air interacted in the engine. Which led to the thermodynamic theory of heat.

    A branch of physics, thermodynamics deals with the relationships and conversions between heat and temperature and other forms of energy like work. The steam engine is a good example of a mechanism for the efficient conversion of heat to deliver momentum.

    We need energy to move a body at rest and to keep it moving. Data on climate change is increasing our awareness of how not all energy is created equal. As commerce in the modern age depends more on energy, we're learning more about the challenges of generating, storing, using, and transporting energy.

    This is one of the reasons why Tesla's mission rooted in accelerating the transition to a sustainable energy economy resonates. In 2015, Tesla Energy unveiled a battery system connected to the internet with integrated heat management for use as a redundancy system, or to allow a home or business to go off the power grid.

    In response to and to create demand for an alternative, Tesla and its sister company SolarCity look to change the way we produce, store, and use power at a lower cost. The company is catering to a movement to decentralize production AND storage. What we consume is based on the efficiency of our environment and tools.

    Human performance also depends on the smart interaction between the person and the environment. Sport shoes, the pole used in pole vaulting, and specialized surfaces that allow storage and return of energy to the athlete serve as examples of how these energy factors work together and affect an athlete's performance. How we fare is based on both the environment and our equipment.*

    We build and sustain relationships through the exchange of energy. Some people draw more energy than they give. Or at least we perceive it as such in our minds, says psychologist Toru Sato. Using what he calls “the internal conflict model,” he says:

When things are going our way, we are comfortable. When things do not go the way we want to, we feel discomfort. All of this has to do with what we desire (or need) and what has, is, or could happen. When what we desire (or need) matches what has, is, or could happen, we feel comfortable. When what we desire (or need) does not match what has, is, or could happen, we feel anxiety or some sort of discomfort.

    Which is why we use the expression “pay attention,” because we literally choose to give energy to another person. It's true that when we perceive that our costs in being involved with someone or an organization are higher than what we get out of it, we let it go.

    Another way of thinking about relationships and energy is within the context of social interactions. Social capital is a form of energy — the more we develop relationships, the better they get, the more things we learn from each other and do for one another or a program, project, and so on.

    When we say that “knowledge is power” today, we mean intellectual capital, which also converts into energy to keep a business from becoming stale. Which is why it's a good idea to keep the ideas flowing and trade them with our surroundings through experiences. The more exchanges we have, the better our intellectual capital becomes.

    Amazon is a good example of an organizations that trades intellectual capital as part of its business model — and in the process it energizes its business back in the form of data and intelligence, which it them deploys to other projects like social shopping. 

    We're familiar with the idea of using tangible mechanisms like the steam engine to generate energy. We understand the power of relationships and at some level the idea that social capital has value. Intellectual property has value because we can trade it in exchange for something else — a premium for proprietary systems, data in many if not most situations.

    Companies are also mechanisms, just like the steam engine. They allow the efficient conversion of various forms of capital to create energy through mutual exchanges of value. But organizations have become overly focused on just one form of capital, the financial kind.

    The race is on to convert all forms of energy — especially but not only those generated by social interactions and relationships — into money. So companies negotiate harsher deals with suppliers, and in some cases run them out of business, have layoffs to get people off their books, and look to hire stars to get the best bang for their buck.

    What they don't consider is the energy costs of this line of thinking — mergers and acquisitions that kill value with the businesses, relationships and knowledge that walk out the door, and the challenge of expecting one person to perform miracles where teams would create longer-lasting momentum.

    In the same ways Tesla is decentralizing power, entrepreneurship is decentralizing the corporation. With a better understanding of network effects and leverage, smart entrepreneurs are building ecosystems, communities of internal and external stakeholders, and alliances based on social capital.

   Mutual exchange of value is a concept many large organizations fail to understand properly. Even revered companies like Apple focus on converting many forms of capital into money. This is another form of Day 2 thinking, as Jeff Bezos would put it. In his most recent letter to shareholders he says:

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

    Day 2 costs much more, and not only strictly in money. Amazon's customer obsession, skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making are signals that the company focuses on relationships and intellectual capital to provide a mutual exchange of value with its stakeholders.

    The question is how to create energy efficiently and how to convert that energy into better energy. It's a pure ROI conversation — what's the return on customer relationships deepening? How can we leverage data better to deliver over expectations (or above)? How do we help buyers and sellers alike get value out of the investment of their time and (yes) money? 

     Organizations are dying at a faster rate because they don't calculate the full commercial ROI. Energy is not a consideration so they miss the value of reputation, trust, and brand. Where regulatory pressure or monopoly situations don't protect them, not considering the social and intellectual costs can be disastrous.

    Bezos says:

To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.

    Fewer transactions, product and service commodification, difficulty attracting and/or retaining customers, and higher customer acquisition costs are just some of the symptoms of a low energy business. Money alone doesn't buy happiness… or longevity.

    As this image above shows, while average US lifespan has increased by sixteen years from 1937 to 2012, over the same period of time, the average time companies remain in the S&P 500 has fallen from 75 to 15 years. The rate at which organizations convert everything into cash has accelerated and deepened their depletion of other forms of energy.

    Entrepreneurs have more leeway in organizing their business around stakeholders rather than mainly shareholders. Technology is making it easier to build and scale relational and intellectual capitals, mindset is helping them stay the course over the years.

    In some cultures, it is the mid-sized to small companies that are playing the long game. Italy has a high number of smaller businesses. Japan has the highest concentration of older companies, shinise, as they call them. Professor Makoto Kanda has studied shinise for decades. He says they can survive for so long because they are small, mostly family-run, and because they focus on a central belief or credo that is not tied solely to making a profit.

    We should resist the temptation to convert the value of such proposition to just money to understand the commercial benefits of a business.

 

* for those interested, Biomechanics and Biology of Movement treats this topic in depth.

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