adaptive cycles & the industry ecosystem

Adaptive Cycles��& ��

the Industry ��

E C O S Y S T E M

��A few weeks ago, I stumbled ��across an article that linked the ��application of adaptive cycles ��from ecology to finance.��

��In addition to its financial utility, I found that many of the ecological principles found in adaptive cycles could also be applied to competitive market environments.��

The following is an excerpt.�� e d I t e d e x c e r p t

In an adaptive cycle, early growth is rapid as individuals of many species S t a r t u p s arrive in a newly opened space.��

They seek to exploit a plethora of ��vacant ecological niches. ��

M a r k e t s e g m e n t s

Wealth��

Connectedness�� Resilience��

Reorganization��

Exploitation��Release��

Conservation��

Connections are initially simple ��and sparse, but over time many ��interconnections and mutual ��dependencies develop.��

The system therefore increases in ��both ‘wealth’ and connectedness, as flows of energy and materials ��C a p I t a l become larger and more ��complex.��

Biological O v e r a l l ‘wealth’ confers the potential for novelty ��I n n o v a t I o n, allowing the system to adapt in disparate directions as circumstances warrant.��

Connectedness permits increasing stability, through the development of negative feedback loops, which help to regulate conditions conducive to life. s u s t a I n a b I l I t y ��

Wealth��

Conservation��

As time passes, rapid growth gives way to conservation.��

Inter-dependencies become highly specialized and self-regulation becomes fine-tuned and sophisticated.��

Efficiency is maximized as niches are fully occupied. ��

Flows of energy c a p I t a l and nutrients r e s o u r c e s are tightly controlled by the existing biota ��m a r k e t l e a d e r s.��

This represents the end of the growth phase.��

Wealth��

Conservation��

Relatively few opportunities are left for newcomers or novel strategies, hence diversity stabilizes or declines.��

The system is ‘rich,’ but becomes more rigid, and therefore less resilient in the face of potential shocks.��

This can propagate rapidly through a highly inter-connected system with smaller margins for error than it had in its generalist phase.��

An increasingly brittle ecosystem ��m a r k e t becomes, in C. S. Holling’s words, “an accident waiting to happen.”��

When something does push the ecosystem m a r k e t outside of the boundaries it can tolerate, the long growth phase can morph into a rapid and chaotic release and reorganization phase.��

Nutrients c a p I t a l and energy ��r e s o u r c e stores previously tied up can suddenly be liberated.��

Wealth��

Conservation��

This can be associated with a considerable loss of complexity, but also with much greater potential for generalist strategies and for novelty. O p e n I n n o v a t I o n

The Automatic Earth, Jan. 2010��

Wealth��

Conservation��

��

I found it uncanny how easily the narrative of an adaptive cycle could apply to the emergence, stability, collapse, and rebirth of an industry. ��

Let’s take an example:��

The Music Industry. ��

Exploitation�� Release��

Conservation��

1 9 2 0 s Early players enter an open market.��

Conservation��

1 9 7 0 s Added labels seek to exploit vacant segments. ��

Conservation��

1 9 8 0 s Added labels seek to exploit vacant segments. ��

Conservation��

1 9 9 0 s System wealth allows for disparate adaptation – niche labels. ��

}��

Flows of energy c a p I t a l and nutrients r e s o u r c e s are tightly controlled by the existing biota m a r k e t l e a d e r s, who have

created a ‘rich,’ but rigid industry structure.��

}��

When something does push the ecosystem m a r k e t outside of the boundaries it can tolerate, the long growth phase can morph into a

rapid and chaotic release and reorganization phase. ��

Conservation��

1 9 9 9 Napster shocks a rigid oligopoly with file sharing software. ��

Conservation��

2 0 0 0 s Chaotic release phase ensues as digital music takes shape. ��

Conservation��

2 0 0 0 s Freed resources and innovation shift toward reorganization. ��

Conservation��

2 0 1 4 New solutions continue to emerge in a liberated landscape. ��

It happens in nature, and it happens in our markets.��

��It’s time we recognize the cycle and as innovators, develop a model that tracks industrial progress through each stage, in an effort to preemptively generate n o v e l s t r a t e g I e s in the anticipation of collapse.��

��

For questions^, please reach out @AlxBrands��

O R c o m m e n t s ��

��Thank You.��

��

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