The Red Queen and Business

Matt Ridley’s The Red Queen: Sex and the Evolution of Human Nature:

The book is named for Lewis Carroll’s character the Red Queen, who said in Through the Looking Glass, “It takes all the running you can do, to keep in the same place.”

What the author is implying is that there is no sustainable competitive advantage. Any advantage over a length of time is short-lived as other species and genes work hard to catch up.   The reason is that instead of being an evolutionarily dynamic machine, nature is actually an organ of stasis.  Everything tends to remain the same unless it is necessary to evolve; or as the second law of thermodynamics puts it, in a closed system everything tends toward chaos.  An anecdote on p. 331 demonstrates the point:

“… Henry Ford once asked his representatives to find out which parts of the Model-T never went wrong. They came back with the answer that the kingpin had never gone wrong; so Ford ordered it made to an inferior specification to save money. ‘Nature,’ wrote Humphrey, ‘is surely at least as careful an economist as Henry Ford.’”

But there are forces that cause change, and that is what we are interested in. Change is based on survival. There are four main themes, facets of survival, detailed in the book:  The ability to acquire valuable resources (to hunt, gather food, etc.), the ability to avoid being eaten, the ability to ward off parasites and diseases, and in sexual species the ability to acquire a mate.  The first three are inter-species relationships; relationships between an animal and the outside world. Sexual selection is an intra-species battle, and is dependent on an animal’s perception of the first three facets of survival in his potential mates.  Each type of relationship has a parallel in the business world.

The inter-species relationships, or “the value proposition.”

The ability to acquire resources and avoid being eaten is essentially the relationship between an animal and his predators and prey. Animals can use strength, speed, discernment, cunning, poison, camouflage, etc. to find food and avoid predators. In addition, animals use biological evolution to prevent parasites and disease. Genes evolve with defense mechanisms to help the body rid itself of viruses, and viruses in turn evolve unique techniques for attacking the body. An animal’s chance of survival depends on all of the survival techniques listed: It is no good if an animal can avoid disease, not be eaten, but cannot find food for himself. Likewise, failure of either of the other two techniques will result in death. Those can be compared to the value that a business creates for potential customers. If a business can differentiate itself from its competitors through cost or quality or convenience (avoid being eaten), have positive profit margins on its sales (find and acquire resources), and avoid theft and errors and unnecessary overhead and turnover (viruses and parasites), it has value.

The intra-species relationships: Sex, or “the customer’s perception of your value.”

Sex is all about marketing. An animal has to market his reproductive value to potential mates. Then the potential mates will choose him as a partner.  The animal has to market his value proposition, or his unique ability to survive and outcompete other species.  But ultimately, mating or lack thereof is what kills genes, multiplies others, and causes evolution.  Think about it: In order to survive, an animal only has to be the least weak. For example, in a species of gazelles, only the slowest gazelle in a pack is eaten by lions. The second slowest survives.  But the second slowest gazelle is not likely to have a plethora of mating opportunities, because speed is an attractive quality to gazelles.

The business parallel to the mating game is marketing and customer relationships. The most valuable product on the market is nearly worthless if no customers will buy it.  So marketing and customer relationships are the drivers of innovation and value.  Ultimately, the demand curve is the market driver, and the supply curve reacts.

The goal of marketing is to lower the customer’s cost of determining the best product. If it will take hours of research to decide which is the best toothpaste, the customer will not bother.  So companies market products in efforts to make it easy for the customer to determine the most valuable products. “Honest genes” emerge, and copycat honest genes follow, and so on. 

Honest genes, as described by the author, are genes that demonstrate to potential mates an animal’s ability to survive. For example, symmetrical patterns on a peacock’s tail can show a healthy upbringing, a lack of parasites, and an ability to find food.  An unhealthy peacock would not be able to grow a beautiful tail. A business can have an “honest gene” marketing campaign: for example, our toothpaste manufacturer might promise whiter teeth or your money back. That is an attempt to make the decision cheaper and easier for the consumer. But just when one honest gene emerges, the market will often spawn a copycat. Rival toothpaste companies might make the same claim, but unknown to the customer, might make cheap toothpaste and renege on their commitment to refunds. Now the quality toothpaste is again buried in the market, the customer is not sure which toothpaste to buy, even though the former brand is clearly the more valuable. That is why consumer perception is so important.  It is  the gene selector, or the decider of a business’s survival.

Since there is no eternally sustainable competitive advantage, the question we want to ask before investing in a company is what is the way to achieve the longest competitive advantage possible? And how can you see a competitive advantage emerging before it happens?  Or an even more pertinent question, how can one predict a company’s competitive advantage and its profits better than the market predicts it?

Sources of competitive advantage, or ways a company can make money: Offer the same product as competitors but for a lower price; offer a unique and valuable product different from competitors; offer the customer a more convenient way to acquire a product; eliminate risk of security, safety, product defects, or poor delivery for the customer in acquiring your product; earn money from a government contract; or rip the customer off.  I believe that all corporate profits fall under one of those six categories.  Compete on price, compete on quality, compete on convenience, compete on security, receive a government contract, or convince the customer that you lead in one of these categories even when you do not.