What Evolution Teaches Us About Innovation

On a family vacation once at a South African game preserve, we were out in a safari vehicle and spotted a pair of rhinos grazing in the distance. Parking the vehicle, our guide suggested we get a closer look by approaching on foot quietly from downwind, so the rhinos wouldn’t smell us. But the rhinos wouldn’t see us, either, because they were facing away from us, into the wind. Puzzled, I asked our guide why a grazing animal wouldn’t naturally have learned to face downwind rather than upwind. For millions of years predators have sneaked up on their prey from downwind, just like we were now doing. He told me that they graze upwind because the grass tastes better that way. The more tannin a grassy plant has in its leaves, the more bitter it will taste. And large ruminants emit flatulence that can be detected by many grasses, triggering them to draw more tannin into their leaves whenever grazing animals are about. As incredible as it sounds, therefore, grass-eating rhinos graze into the wind so the grass doesn’t know they’re coming.

Evolution is a truly beautiful mechanism for ensuring that life persists and prospers. And with all due respect to anyone’s religious beliefs, God could hardly have chosen a more intelligent way to design life than by employing the inexorable yet beautifully intricate dance of evolutionary forces.

Increasingly, economic thinking has come around to the belief that the forces driving economic activity can be understood through evolutionary modeling, as well. While the mathematics of the "neoclassical model" of economics are very useful, with supply always being equal to demand, the truth is that the economy is never in equilibrium. Instead, creativity, innovation and change propel all economic activity. People create new things and devise new technologies in order to make a profit by meeting some need, and the change they generate drives the economy, which leads to an evolutionary model of economics, one based on constant equilibriums. As Eric Beinhocker says in The Origin of Wealth, his marvelous and comprehensive survey of this topic, the innovations that make the most profit are the most “fit” for survival, and are more likely to be imitated by others. But failures are imitated much less frequently than successes, so a failing business model soon becomes extinct. 

One of the tools evolutionary science has developed for understanding how the process works in biology is the “fitness landscape.” This is a visualization of how organic species evolve toward ever greater fitness, both by constant adaptation and survival of the fittest, as well as by occasional mutation. This model can be readily applied to thinking about innovation and economic progress, as well. An example fitness landscape, from a Bryn Mawr website is shown below:

It's just an imaginary space, but fitness is measured by the height of the terrain in the landscape. The higher up a species is, the more “fit” it is as a species, whether that means it’s a ground squirrel that can outrun most foxes, or a fox that can outrun most ground squirrels. Over time, both foxes and ground squirrels will get faster and faster, each of them climbing gradually upward on this symbolic landscape. But the landscape isn’t a uniform slope, either. Some slopes are steeper than others (representing faster or slower routes to more fitness), and there are a lot of local peaks of fitness, where no further adaptation will improve fitness  by very much.

In addition to the steady climb represented by survival and adaptation, however, a species will also occasionally mutate, and a mutation might catapult it from one local peak to another, in essence allowing an even higher level of fitness (imagine ground squirrels mutating claws that make them capable of climbing trees to avoid being eaten by foxes).

There is a direct analogy here to the way innovation occurs in the economic world. As businesses in a particular industry or category compete, they will all get more and more efficient, like the fox competing with the ground squirrel for higher speeds. These are incremental innovations. But truly breakthrough innovations will in fact launch a business from one local peak to another, where it will renew its struggle to make incremental innovations that drive more and more efficiency. 

Unlike organic evolution, economic evolution is driven by human ingenuity. It is directed, and the result is that the vector of progress is much steeper and inherently more efficient than it would be if business innovations merely occurred randomly, as genetic ones do. And as the pace of innovation accelerates, the pressure on a business to adapt or perish increases. One comprehensive study cited by Beinhocker examined thousands of firms in 40 industries over a 25-year period to understand how long the most profitable ones could maintain their superior economic performances – which the researchers defined in terms of a statistically significant difference relative to their peers.

This study revealed that the periods during which any single company can consistently maintain above average results are decreasing, regardless of industry, size of firm or geography. Using a series of rolling five-year periods for their analysis, the researchers found that just 5% of companies were able to string together ten or more years of superior performance, and less than a half percent of their sample (only 32 firms out of the 6,772 analyzed) performed above their peers for 20 years or more.

The truly outstanding performers in this study were those able to string together a series of short-term competitive advantages, rather than maintaining a single long-term advantage. You can gain a short-term advantage with a differentiated product or service, but to survive the evolutionary process you need the ability to respond to change and string a number of these advantages together.

Note carefully: If this evolutionary view of economic progress is correct, then there really is no such thing as a “sustainable” competitive advantage for any business. Sustainability is not possible in an evolutionary system. Instead, success in business, as in the natural world, will come to those “most responsive to change.”

When the grass becomes too bitter to eat, turn around and try facing into the wind.