What’s wrong with Clay Shirky’s post on The Collapse of Complex Business Models

This post by Clay Shirky, The Collapse of Complex Business Models, has been getting alot of attention, as it should. Let me cut to the chase and by slightly paraphrasing Shirky, highlight the main idea:

“Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond….When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. … Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.”

I think this is a valuable analysis of a complex system, and for complex systems where all the inputs and outputs are tightly linked together, I think that this collapsing behavoir is one you would expect to see.

I also think his examples of media companies and AT&T are good ones, because you have companies where all the input (the lines of business and associated revenue streams) are tightly coupled to the output (profitability). Furthermore, the dominant lines of business (e.g. print) constrict the subservient but more profitable lines of business (new media).

I think there are a few things wrong with this idea, however, and they center around the ideas of complexity and collapse. Some of the organizations with complex business models that are due for a collapse aren’t just in trouble because of complexity; they are also in trouble because they are singularly focused. There is little if any diversification. They are not just inflexible: they’re like one big tower of playing cards. Smart investors and businesses diversify their portfolio. Not only that, but smart businesses should have parts of their businesses in different phases of development, so that if a new line of business collapses, other new lines of business or mature lines of business will continue to support the growth of the company. Indeed, in most organizations, the mature lines of business may be complex, but the new lines should be less so. If not, then this is an organization behavioral problem more than a complex business model problem.

There is also the notion of how you manage collapse. For example, smart businesses recognize mature lines of business and know how to milk them while preparing for their eventual demise. There is not so much a collapse as there is an orderly winding down of the business. It takes discipline and an acknowledgement of the circumstances, but the collapse is orderly, not catastrophic (walking down stairs versus tumbling down them). Companies that don’t have discipline and don’t acknowledge the circumstances will fail catastrophically.

A number of years ago CityTV in Toronto took on a new, cheaper approach to gathering the news. It was simpler and cheaper than the way other media companies did it. But it was effective, and it forced the other companies to do that. The other media companies did not collapse, however. They adjusted, however painfully.

I think Rupert Murdoch is trying to make the adjustment as well. He is experimenting with different forms of media (MySpace) and different ways of generating revenue. He is failing to some degree, which makes it easy for people to say he is a failure. He may fail completely, unable and incapable of generating new business models to support his company. But if he succeeds, he will have found a way to be profitable with new media and likely generating new, simpler business models that will support them. Other companies will follow his lead. (Or someone else’s lead.)

I think media/communications companies may have to abandon some of their business models, but I think such companies will remain and they will eventually develop new mature and complex business models.

Anyway, some thoughts on Shirky’s post. It’s a great post, and a great extention of the idea of collapsing complex societies to collapsing complex business models.

5 responses to “What’s wrong with Clay Shirky’s post on The Collapse of Complex Business Models

  1. I’ve been looking for a critique of Shirky’s post, so I welcome this.

    The point he is making is what economists call “rents”. This is a society level phenomenon rather than a business level phenomenon.

    The simple example is a Mercedes Benz that is driven without maintenance. It goes and goes and we are tempted to believe that it will continue going. One day, quite suddenly, it doesn’t.

    I’ve lived through a collapse (2 actually). One led to a revolution and the next to a collapse and those who could “ran for it”. In both, elites were taking out more than they were putting in. Though they felt as if they were working hard, as a group they cost more than they were worth.

    Shirky’s point is that this time the collapse might be global. That is mind boggling.

    I have never been a luddite but when you consider the attempt to pass the #debill through washup as the UK parliament closes down for the election next month, then shivers run down one’s spine.

    • smartpeopleiknow

      Wow. You packed alot in your comment, which is a good one. Let me try and comment back.

      Rents are important. Humans are not very good when it comes to commons, unless the impact on the commons that the group has collectively in minimal (spitting in a lake won’t damage it but dumping poisonous chemicals will). So rents are an important feedback mechanism to control the use of the commons. Otherwise, like your example of the Benz, you get breakdown.

      With the world itself, we have a great big commons, and yes, there are insufficient rents being paid there, and the result can be catastrophic for us. That’s why I believe some form of taxation / rent to produce carbon would be valuable, because not only will it incent people to produce less (pay less rent) but it might also incent others to help us gain rnt reductions (for a fee, of course).

      My criticism of Shirky’s idea is that he implies that companies with complex business models are inclined to collapse. I don’t see that, although media companies and any singular company with singular focus, high profit margins, and complex structures are at risk there.

      I have seen lots of mention of #debill, but I don’t know much about that. I am surprised that Labour is giving the Tories a go of it. I thought the clock had run out on Labour and Brown and Cameron would take it with a romp, but it appears not to be the case yet. That said, I think people will break to the Tories at the last minute.

      Great comment! Thanks!

  2. Ah, I think when economists say rent they don’t mean what I pay for my apartment each month. I think it is the polite way of saying money they haven’t earned.

    Shirky is talking about industries rather than companies (I think). He is a sociologist not a management theorist.

    #debill (Digital Economy Bill) gives supposed owners of copyright sweeping powers to shut off internet access with little due process. Rushed through on the last day of the parliament including a Tory ‘whip’. Here you have to vote for your own party. For what it is worth, UK is preparing for a hung parliament which would be dealt with by a coalition normally and will probably collapse after 9-12 months. It could produce some odd bed fellows or even a far right government.

    I think Shirky is correct about the collapse of industries. A scenario where we are scrambling to build new industries and competing with BRIC is quite different from BRIC going down with us. That’s what interests me.

    You may be interested in this blogger. She writes well and is standing as a Labour MP.http://www.debtonation.org/2010/04/a-moral-economy-interest-usury-and-islam/

    • smartpeopleiknow

      I think you should get a blog! You’d be good.

      As for your comments…you’re right: I was using the term rent loosely, but more in line with the classic idea of land rent. That said, the terms rent and commons were used loosely, and the environment doesn’t perfectly align with the idea of plots of land.

      My reading of Shirky is that he is jumbling a few things around in his post. He may be talking about industries, but he is very specific in his examples (e.g. ATT). I also think that his ideas have influence on organizations and how they structure their business, which puts him closer to management theorists than sociologists.

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