Inertia and Entropy in Business
My reflection on a chapter from Rumelt's Good Strategy, Bad Strategy
Rumelt dedicated an entire chapter to inertia and entropy in his book “Good Strategy, Bad Strategy”. I’m writing this to better understand the chapter in all its depth.
Inertia
In companies that have been around for some time, they often run into three kinds of inertia that prevents them from responding efficiently to change. Inertia from routine, inertia from culture, and inertia by proxy.
Inertia from Routine
Rumelt used airline deregulation to illustrate inertia from routine. When the airline industry was deregulated, airlines could now charter whatever routes they wanted at market prices. When Richard analyzed the implications, he saw that short-haul prices would increase to equilibrium (previously under-priced due to government subsidies) and this new profitability would make them more attractive for airlines to offer. However, most airlines were still forecasting with pre-deregulation tools when long-haul flights were more attractive. Their tools told them long-haul prices would rise and be more profitable. Thus, the big airlines invested heavily into new equipment for long haul, supply went up and prices dropped. The profitable airlines in the deregulated period were the short-haul providers.
The lesson I took from this example is to critically analyze the effects of an external shock. Whether it be the advent of a new technology or deregulation. Peter Thiel echoed this in Zero to One, thinking deeply about the future is one of the highest leverage things you can do.
Inertia from Culture
Rumelt used the example of AT&T in the 80s to illustrate inertia by culture. When he was a consultant for AT&T, he recommended clever strategic moves to productize their innovations from their R&D in Bell Labs. However, he was unaware of the culture at Bell Labs. They were only concerned with R&D and had a distain for product. One simple demo request took them months.
The first step to changing a culture is to simplify. Simplify your business by getting rid of the excess operations, administrations, and processes. This reveals the bad behaviors that were hidden by layers of self-interest. He then recommends fragmenting each unit to break political coalitions and expose each unit’s leadership to scrutiny. The norms (culture) of each unit are taken from their leader, therefore to change a group’s norms the alpha must be replaced by someone with different values and norms.
If you establish a challenging goal within the unit (relates to Rumelt’s idea of a proximate objective), it will help build new work habits within the unit as everyone works to meet the deadline. Only once each unit is working efficiently should you begin to defragment them.
Inertia by Proxy
Inertia by proxy is when an organization doesn’t change because of their customer’s inertia. For example telecom companies in the 90s didn’t switch to a cheaper alternative because their customers didn’t care yet. This led to a bubble in the share price of new telecom businesses. It was not until smaller providers began to take share that bigger telecoms took notice and took all their customers back. The new telecom providers had failed to develop any stickiness and the bubble popped.
Entropy
The second law of thermodynamics explains why there are weeds in your garden, potholes in your roads, and inefficiencies in your business. It even explains why AA members remain vigilant about their rehabilitation after years of sobriety. Any system will incur more and more entropy if not carefully managed. In business, entropy is the reason why consultants and managers will always have work.
A carefully crafted strategy must be carefully managed and steered on course to resist the looming effects of entropy. At GM, the strategy that carved out a distinct price range for each of their brands fell to entropy. Over the years, each brand began creep into each other’s price ranges, increasing inter-company competition. Despite GM’s adherance to the strategy on paper, their mangement didnt keep course.
I find the mental model of thermodynamics immensely helpful in other domains such as my personal habits and business strategy. Thank you Richard Rumelt for an insightful and well-written chapter.