In the 1960s, Edward Lorenz, a meteorology professor at MIT, entered data into a computer program simulating weather patterns and then took a break while the computer processed the information. Upon reviewing the results, he noticed an outcome that led to what is now known as the Butterfly Effect.
Lorenz’s computer model inputted twelve KPIs, such as temperature and wind speed. During this particular simulation (one that he had run previously), he rounded off one variable from .506127 to .506. Dizikies writes, “to his surprise, that tiny alteration drastically transformed the whole pattern his program produced, over two months of simulated weather. The unexpected result led Lorenz to a powerful insight about the way nature works: small changes can have large consequences. The idea came to be known as the ‘butterfly effect’ after Lorenz suggested that the flap of a butterfly’s wings might ultimately cause a tornado. And the butterfly effect, also known as ‘sensitive dependence on initial conditions,’ has a profound corollary: forecasting the future can be nearly impossible.”
This seemingly innocuous finding challenged some core scientific principles. Isaac Newton published “laws” in 1687 that suggested a tidily predictable mechanical system, known as the “ clockwork universe.” Mathematician Pierre-Simon Laplace whose work was important to the development of engineering, mathematics, statistics, physics, astronomy, and philosophy, wrote that if we knew everything about the universe currently, then “nothing would be uncertain and the future, as the past, would be present to [our] eyes.”
Lorenz’s findings challenged both Newton and Laplace, as unpredictability does not impact how they explain the world. Dizikies explains, “the tiny change in [Lorenz’s] simulation mattered so much showed, by extension, that the imprecision inherent in any human measurement could become magnified into wildly incorrect forecasts…. After Lorenz, we came to see that determinism might give you short-term predictability, but in the long run, things could be unpredictable. That’s what we associate with the word ‘chaos’.”
This concept of chaos amplifies how the world is nonlinear. “The principle of chaos drove home the importance of non¬linearity, a characteristic of many natural systems. If a group of 100 lions has a net gain of 10 members a year, that increase in population size can be plotted on a graph as a straight line. A group of mice that doubles annually, on the other hand, has a nonlinear growth pattern; on a graph, the population size will curve upward. After a decade, the difference between a group that started with 22 mice and one that started with 20 mice will have ballooned to more than 2,000. Given that type of growth pattern, the real-life pressures on species — normal death rates, epidemics, limited resources — will often cause their population sizes to rise and fall chaotically. While not all nonlinear systems are chaotic, all chaotic systems are nonlinear,” explains Dizikies.
Butterflies are not random
A critical element of Chaos Theory is that it does not imply randomness. Dizikies writes, “One way that he demonstrated this was through the equations representing the motion of a gas. When he plotted their solutions on a graph, the result — a pair of linked oval-like figures — vaguely resembled a butterfly. Known as a “Lorenz attractor,” the shape illustrated the point that almost all chaotic phenomena can vary only within limits.” The key here is that the butterfly is a range of possible results, but there are boundaries.
While the effect is not random, it is also not predictable. Nature’s interdependent chains of cause and effect are too complex to disentangle. Thus, you do not which butterfly, or gnat, may have created a given storm.
The Butterfly Effect and gaming companies
The value of understanding the Butterfly Effect for gaming companies goes beyond knowing if you need to bring an umbrella to the office. Just as weather patterns are unpredictable due to the myriad of factors that can cause a storm, the business environment is equally unpredictable. A new law in a market you are not engaged or a product launch in a different industry can end up changing the dynamics of your business. The most obvious recent example is how bats in Wuhan, China ended up driving catastrophic effects on the travel (and many other) businesses, while driving online gaming revenue to unprecedented levels.
The Butterfly Effect is why you need a resilient business
In the 1960s, Edward Lorenz identified the Butterfly Effect when inputting multiple KPIs into a weather program, rounding one number, and seeing that the seemingly insignificant rounding change led to a momentously different outcome.
The importance of small changes on outcomes shows that activity is not predictable, and this challenge extends to the business environment.
To manage effectively and overcome the unpredictability of the world, you need to build a resilient business and move away from a hierarchical, command and control structure.
Last year, the most valuable book I read was General Stanley McChrystal’s Team of Teams and I found his discussion of building an organization to deal with a complex environment particularly useful. The world today is very complex, with events everywhere impacting severely your business, yet most companies are built for a less inter-connected, albeit complicated, world. McChrystal showed that being complex is different from being complicated. Things that are complicated may have many parts, but those parts are joined, one to the next, in straightforward and simple ways. A complicated machine like an internal combustion engine might be confusing to many people but it can be broken down into a series of neat and tidy deterministic relationships. Conversely, things that are complex, such as insurgencies or the mobile gaming ecosystem, have a diverse range of connected parts that interact regularly. Due to this complexity, you need to build a resilient organization that can adapt to changes in the external environment.
Given the importance of resiliency, I then read a book referenced in Team of Teams, Resilience Thinking by Brian Walker. While the book is primarily about resilience in the environment, it lays the groundwork for managing resources in a business and navigating a complex environment.
At its core, resilience thinking is based on the concept that things change and to ignore or resist this change is to increase your vulnerability and forego emerging opportunities. If you do not implement a resiliency strategy, you limit your options. Additionally, Walker points out that business is characterized by dynamic change and it is as critical to manage systems to enhance their resilience, as it is to manage the supply of specific products.
Resiliency versus optimization
One of the ways that resilience thinking prompts you to take a different approach is by helping you understand the costs of optimization. I have been trained, especially in the gaming space, that the key to success is perpetual optimization (even used that phrase to help sell a company once). We always look for ways to create the most output with the fewest resources, optimize every event in a game based on ABn tests and reduce any “wasted” effort by employees, customers and other stakeholders. Walker says, “humans are great optimizers. We look at everything around us, whether a cow, a house, or a share portfolio and ask ourselves how we can manage it to get the best return. Our modus operandi is to break the thing we’re managing down into its component parts and understand how each part functions and what inputs will yield the greatest outputs.”
An optimization approach aims to get your business into an optimal state and maintain it. Walker explains, “to achieve this outcome, management builds models that generally assume (among other unrecognized assumptions) that changes will be incremental and linear (cause-and-effect changes)…. Ecological systems are extremely dynamic, their behavior much more like the analogy of a boat at sea. They are constantly confronted with ‘surprise’ events such as storms, pest outbreaks, or droughts. What is optimal for one year is unlikely to be optimal the next.” Resilience thinking shows that optimization is not a best-practice as the business ecosystem is usually configured and reconfigured by extreme events, not average conditions.
Walker uses several examples to show how these extreme events actually drive business. Sometimes a competitive product only has a minor impact and at other times it can destroy your business. In some cases a change in interest rate does not impact growth, other times it causes a crash. Resilience thinking is the capacity of a business to absorb disturbances like these and still retain its basic function and structure. Being efficient, by definition, leads to elimination of redundancies as you only keep those activities that are directly and immediately beneficial. Walker writes, “the more you optimize elements of a complex system of humans and nature for some specific goal, the more you diminish that system’s resilience. A drive for an efficient client optimal state outcome has the effect of making the total system more vulnerable to shocks and disturbances.”
Thresholds versus linearity
The most important takeaway from Walker’s book, and resiliency theory in general, is the importance of thresholds. To understand the need for resilient thinking, the first step is learning about thresholds. In non-business terms, systems can exist in more than one kind of stable state. If a system changes too much it crosses a threshold and begins behaving in a different way, with different feedbacks between its component parts and a different structure. This is not a gradual, linear progression but almost a jump between realities. Think of an airline operating in January 2020 versus their situation in April 2020.
Walker explains how systems, including business systems, shift between thresholds. He uses the analogy of a ball and basin.
System as a Ball in a Basin. The important variables you use to describe a system are known as the system’s “state” variables….
We can envisage the system as a number of basins in two-, or four-, or n-dimensional space…. The ball is the particular combination of the amounts of each of the n variables the system currently has-that is, the current state of the system. The state space of a system is therefore defined by the variables that you are particularly interested in, encompassing the full array of possible states the system can be in.
And it’s not just the state of the system (the position of the ball) in relation to the threshold that’s important. If conditions cause the basin to get smaller, resilience declines, and the potential of the system to cross into a different basin of attraction becomes easier. It takes a progressively smaller disturbance to nudge the system over the threshold. Figures 3 and 4 shows this using the ball in the basin analogy.
If you think of a system as a ball moving around in a basin of attraction, then managing for resilience is about understanding how the ball is moving and what forces shape the basin. The threshold is the lip of the basin leading into an alternate basin where the rules change.
I have seen many examples of this ball and basin philosophy in the business world:
A mobile game company progressively tightens its economy. Product managers increase monetization by worsening the exchange rate or limiting the amount of free play. Each of these changes has a positive impact when AB tested but after six months or a year, they have to sunset the product.
A slots developer has a successful slot machine. They keep making small changes to the math and one year later nobody is playing the machine.
A company hires a new COO who cuts costs by reducing the customer service team by 10 percent. Customers only have to wait an extra 45 seconds to get their request dealt with. Initially, KPIs are unchanged but six months later they find they lost 25 percent of their most valuable customers.
A new CTO optimizes load time of slot machines in a mobile casino by 0.5 seconds. When surveyed, players did not even see a difference. KPIs, however, improve 30 percent.
A product is growing 10-20 percent annually for 5 years. They then make a series of small improvements to the way they work with customers and the flow within the product. Growth goes from low double digits to triple digits but nobody can point to one improvement.
These are all examples where small changes by themselves had negligible impact or even an opposite initial impact, but over time combined they moved the product from one basin to another, causing a tremendous shift in KPIs. Resilience thinking is about looking at the entire ecosystem rather than optimizing one or two events.
This threshold approach shows different ways to approach traditional situations. If the business is stuck in an undesirable “basin”, then it might be impossible or too expensive to manage the threshold or the system’s trajectory. In this situation you may consider transforming the very nature of the system by introducing new state variables (e.g. a subscription model).
You should also consider thresholds when making changes. Walker asks, “how much disturbance and change can a system take before it loses the ability to stay in the same basin?….Along each of these key variables are thresholds; if the system moves beyond a threshold it behaves in a different way, often with undesirable and unforeseen surprises.
Once a threshold has been crossed it is usually difficult (in some cases impossible) to cross back.”
Thresholds also suggest a different way to look at your data and products. You need to understand what thresholds lie along your variables, and knowing how much disturbance it will take to push the system across these thresholds. As Walker says, “to ignore these variables and their thresholds, to simply focus on getting better at business as usual, is to diminish the resilience of the system, increase vulnerability to future shocks and reduce future options…. A system’s resilience can be measured by its distance from these thresholds. The closer you are to a threshold, the less it takes to be pushed….There is a much higher likelihood of crossing a threshold into a new regime if you are unaware of its existence.”
You can’t neglect the environment
One of the driving forces making resiliency increasingly important compared to efficiency is the complexity of the global business ecosystem, particularly in the gaming space. Walker explains, “we all live and operate in social systems that are inextricably linked with the systems in which they are embedded; we exist within social-ecological systems. Whether in Manhattan or Baghdad, people depend on ecosystems somewhere where for their continued existence. Changes in one domain of the system, social or ecological, inevitably have impacts on the other domain. It is not possible to meaningfully understand the dynamics of one of the domains in isolation from the other.”
2020 drove home the impact of the external environment on many businesses. It is a major component of resilience thinking and an important point of difference with traditional science that has modeled the world based on the assumption that change is incremental and predictable.
Resiliency is managing shocks
Resilience is the capacity of a system to absorb disturbance; to undergo change and still retain essentially the same function, structure, and feedbacks. In cases where you have a particularly successful product or business, this resiliency even more important as you do not want to lose what you have achieved (and success is not easy in the gaming space). Walker writes, “it’s the capacity to undergo some change without crossing a threshold to a different system regime, that is a system with a different identity. A resilient social-ecological system in a ‘desirable’ state (such as a productive agricultural region or industrial region) has a greater capacity to continue providing us with the goods and services that support our quality of life while being subjected to a variety of shocks.“
Resilience thinking is about understanding and engaging with a changing world. By understanding how and why the system as a whole is changing, you can build a capacity to work with change, rather than being at its mercy.
An understanding of what is happening above and below your specific business is critically important. You should ask yourself what effect do these changes exert over the scale in which you are operating. It is also important to identify the key slow controlling variables that may move you between thresholds. While I focused previously on a combination of internal factors that could cause your company to change “basins,” it could also be due to a combination of external factors (e.g. a virus and trade war) or a few of each. Look for, and understand the drivers of slowly changing variables in your ecosystem. Also, simplifying or optimizing the system for increased efficiency reduces diversity of possible responses to disturbance and you become more vulnerable to stresses and shocks.
Recovery is key
Given all the variables that impact your business, rather than anticipating each of them, resilience thinking prepares you to recover quickly from shocks. The key to a sustainable business is capacity to recover after a disturbance. While Walker’s book was published in 2006, Covid proved how important it is to be able to recover from existential disturbances.
It is also critical that the ecosystem and the social system are viewed together rather than analyzed independently, and that both went through cycles of adaptation to their changing environments as adaptive cycles happen everywhere.
By adaptive cycles, Walker is referring to two modes, Fore Loops and Back Loops. Walker writes, “a development loop (or ‘fore’ loop), and a release and reorganization loop (or ‘back’ loop) (see figures 9 and 10). The fore loop (sometimes called the front loop or forward loop) is characterized by the accumulation of capital, by stability and conservation, a mode that is essential for system (and therefore human) well-being and …the back loop is characterized by uncertainty, novelty, and experimentation. The back loop is the time of greatest potential for the initiation of either destructive or creative change in the system. It is the time when human actions-intentional and thoughtful, or spontaneous and reckless-can have the biggest impact.”
Resilience is the capacity of the business to absorb change and disturbances and still retain its basic structure and function, maintaining its identity.
How to manage for resiliency
The first key to building a company that can navigate the complex and inter-connected world is looking outward, not simply focusing on doing what you are doing now but better. Realize that the future has a habit of throwing up surprises, a product of the complex nature of social-ecological systems.
Rather than try to simulate the future, explore different potential scenarios. Walker writes, “scenarios are not predictions of what will happen. They are an exploration ration of what might happen….Scenarios help organize information, and they are easy to understand. Scenario planning is also a good way to open discussion among different groups of people who might not otherwise interact….For this reason the scenarios should be considered together, not separately. They should be thought of as a set that provides us with a range of insights on what makes a region vulnerable and what confers resilience.”
Second, you should also put resilience thinking into practice. It represents a different way of looking at the world. It’s about seeing systems, linkages, thresholds, and cycles in both what is directly important to your business and in what that drive them. It is about understanding and embracing change, as opposed to striving for constancy.
Third, keep thresholds top of mind. Understand what are the key slow variables that drive your business’ ecosystem and although a small change might not have a negative impact, know that a series of them could push you into another state. Ask whether these variables are changing and what are the thresholds beyond which the ecosystem will behave differently. Thresholds are defined by changes in feedbacks, so understand which important feedbacks in the system are likely to change under certain conditions.
Finally, understand that resilience comes at a cost. It comes down to a trade-off between foregone extra profits in the short term, and long-term persistence and reduced costs from crisis management. Managing for specified resilience is important, but so too is maintaining the general capacities that allow your company to absorb unforeseen disturbances.
Resilience thinking is based on the concept that things change (both within and externally to your business) and to ignore or resist this change is to increase your vulnerability and forego emerging opportunities.
The world is not linear, instead we operate in thresholds. Like a basin, small changes keep you in a certain range but then combine to pass over a threshold and move you into a completely different business situation. You need to understand what are the key slow variables that could end up moving you into a much worse (or better) position.
Resilience thinking represents a different way of looking at the world. It’s about seeing systems, linkages, thresholds, and cycles in both what is directly important to your business and in what drives them. It is about understanding and embracing change, as opposed to striving for constancy.