"When virtue is lost, benevolence appears, when benevolence is lost right conduct appears, when right conduct is lost, expedience appears. Expediency is the mere shadow of right and truth; it is the beginning of disorder." Lao Tsu
Also, it seems that every orbital body (such as Earth's moon) undergoes the process of entropy - a deterioration in its orbit that is similar to an object caught in a whirlpool. Also called "Orbital Decay", every revolution around the Earth, the moon gets slightly closer. And it will continue to do so until it is inevitably trapped beyond a point of no return where it will crash violently through our atmosphere and become one with our planet. Lucky for us, it will be eons before that happens.
If left to progress too far, this inexorable march downward can only be stopped by the application of a massive external force in a manner that will correct the orbit, yet not destroy both the moon and the Earth simultaneously. However, if nothing is done, the results are as inevitable as death or taxes. The system fails.
But there is another choice. We can stop this creeping disorder. If precise corrections are made along the way, an orbit does not have to decay, and a much smaller level of force is required. In the case of the moon, mankind does not have the ability as of yet to make the small adjustments necessary to keep the moon stable for all of eternity, but we can stabilize smaller objects, like satellites, throughout their useful lives. NASA does this by efficiently correcting the orbits of the satellites on a daily, if not hourly, basis.
In another application, a good friend of mine is a bodybuilder. He monitors his intake of fats, carbohydrates, protein and fluids religiously every day. And each day he makes small adjustments based on the results of the previous day. He also combines weight training with cardiovascular training so as to make sure he is in peak health all of the time. These are the daily adjustments required for him to avoid or postpone the process of entropy that his body would experience if he were to stop. If he were to stop for too long, then a massive corrective force would need to be applied to get himself back into shape.
As business leaders, we must recognize the concept of entropy and realize that ignoring any part of our business could lead to a downward spiral that could destroy the business. Most entrepreneurs are great at marketing their products and ideas. They spend their waking time promoting and building a business, but have little interest in the underlying systems that make the business possible. This entrepreneurial myopia, however, is dangerous. Just as our bodies include subsystems like our heart, brain, organs, skin and musculoskeletal tissue, our business systems are made up of subsystems like marketing, operations, accounting and human resources. Each of these areas require attention on a regular basis in order to recognize the ongoing corrective forces that are required to keep the whole system running smoothly.
Here is how we use entropy as a model for business:
In the beginning, Enron started out pretty well. It was created by the merger between Northern Natural Gas and InterNorth, two relatively solid companies. Over the next 10-15 years, though, Enron dedicated most of their time and energy to creating new ways to account for their revenues, regardless of the lack of cash-flow to support them. This allowed them to take on larger and larger quantities of debt. The accumulation of debt was never supported by the cash flows, so they had to continue to manufacture phantom earnings in order to justify more debt, which would then be used to pay the debt service of the previous debt. This cycle kept going until somebody decided not to loan them any more money. At that time, the whole house of cards came tumbling down and the shareholders were left to pick up the pieces. Let's examine this from an entropic basis.
- It began with a stable system,
- Management began focusing on one aspect of the system,
- In order to support that aspect the rest of the system began compensating,
- The system began to be artificially supported,
- When the artificial supports were removed, the system failed. Spectacularly.
I know I pick on Enron a lot, but they are such a textbook account of massive system failure in a business. It is not just Enron that we can use as an example - unfortunately there are plenty of others like WorldCom and Tyco, where the systems either collapsed from an insidious failure or a massive correction was required in order to right the ship.
When you are looking at your business, realize it is an organic, living system that needs constant attention in all aspects. Here is a blueprint for avoiding an entropic decay:
- If you are an entrepreneur, you need to recognize your weaknesses and compensate for them,
- If you do not have enough expertise in a particular subsystem, hire those who do,
- Create an outline of all of the subsystems in your business,
- Create a regular review schedule that is designed to identify weaknesses in each subsystem,
- Make the ongoing corrections necessary to keep the subsystem performing.
Avoid: non-organic fixes such as additional debt, artificially low sales prices, taking on the actual work of the subsystem yourself, etc. - short-term fixes often create an imbalance in the system that end up hastening the collapse. In general, if the fix to one subsystem negatively impacts another subsystem, you are beginning to create an imbalance that will lead to the deterioration we are trying to avoid.
Finally, avoid the easy fix. Be prepared to roll up your sleeves every day in every aspect of your business. Know what is going on in the subsystems and be prepared to fix them.