I’ve talked before about the rock-solid theory behind dynamic business models that enable them to be true digital twins – accurate replicas that both look like and behave like the real world.
But how to illustrate the deep, deep principle that makes this so … ?
Feathers and flapping
Think back to those early, brave souls who thought it would be great if man could fly, but wondered how it might be done. What did they observe?
Well, just about everything they saw that could fly seemed to have feathers, and flapped its wings. So that’s what they tried. Flapping seemed to be too hard for humans to manage, so some just tried wings that didn’t flap, accepting that they could only glide that way. But still – worth a try?
We might say they believed flying ability to be “correlated with” the possession of feathers and flapping wings.
The aerofoil to the rescue
Sad to say, their theory was inadequate, often fatally so!
It was only when the critical component – the aerofoil – was discovered that flight became possible. It offers a simple, but powerful theory. If air can be made to go faster over a bulging upper surface of a wing than over the under-surface, it will be ‘stretched’, reducing the pressure. With less pressure above the wing than below, it is pushed upwards – along with anything attached to it, like a plane.
It doesn’t matter if you are an albatross, a Dreamliner or a helicopter, that’s what keeps you aloft. (Hot air balloons, of course, deploy a different but equally simple theory, that warm air is lighter than cold!)
Feathers and flapping may enhance what you can do with your wings, but it’s still the aerofoil component that is essential.
Business feathers and flapping
Like those early aviators, we too have been searching for a theory to explain business performance. And being much smarter than them, we have employed much more sophisticated tools to seek out and prove those explanations – notably statistical correlation.
We have tried to correlate business performance – usually indicated by profitability ratios – with everything from market share to R&D-intensity to numbers of competitors. When none of that seemed usefully reliable, we thought that more intangible, abstract ’causes’ must be involved, like organisational culture. But like the morning mist, those ephemera proved hard to pin down, and countervailing cases kept killing the hypotheses in any case – some very successful organisations have truly horrible cultures.
Management meanwhile, frustrated with this pseudo-science, hope that new, shiny feathers will do the trick – like the Net Promoter Score.
The accumulating stock
Our “aerofoil” is equally simple, but just as fundamental.
Business performance, on any measure, is ultimately dependent on accumulating stocks -things that are built up or deplete over time. Customers drive sales, so winning and retaining customers (all else being equal or OK) drives growing sales. Filling the stock of intermediaries helps fill the stock of customers, as does filling the stock of good products. And filling the stocks of staff and capacity enable those good things to continue. Allow those stocks to drain or deteriorate, and trouble ensues
The unfortunate (or fortunate?) thing about any stock is that all of its history matters. If adding a great product 20 years ago won us a ton of customers (and we weren’t careless enough to lose them again!), that product is just as significant to today’s sales as the contribution of another great product launched last year.
… which is why trying to correlate business performance with anything is meaningless.
But here’s the thing – that dependence of performance on those stocks and their time-behaviour is so deeply fundamental and irrefutable that NO explanation that excludes them can possibly be valid.
That’s why the accumulating stock is our aerofoil, the critical component without which flight is not possible.
See also “What is an asset stock and why should I care?“
How business stocks work and how to model their behaviour and impact is explained and demonstrated in class 3 of our core course on digital-twin, dynamic business models.