Universal Laws of Physics and Companies

What’s at stake

The world is changing at an accelerating rate. Tomorrow’s world will be different than it is today, and the successful entrepreneurs will be the ones who best manage for change and those who don’t will be out of business.

Roughly every eight to ten years a new technology upends markets and transforms industries. After the PC came the router, then the internet, then mobile and then the cloud. New changes are on the horizon. Will your company be ready?

No company is safe

Even the best companies are vulnerable to change. A brief glance at the Fortune 1000 illustrates how tough it is to survive. Every decade, the percentage of legacy companies in the Fortune 1000 drops sharply. Today, three-quarters of the Fortune 1000 are less than ten years old. Which means roughly 750 of the top 1000 companies in the world couldn’t keep up with the pace of change for more than a decade.

Even the Dow 30, who by definition are the cream of the crop, are at risk: only four have survived since the 1960s. Change may feel risky, but the biggest risk is not changing. Stasis equals certain failure.

Change requires innovation. One consistent source of innovation has been the transfer of ideas from one field to another. Robert Hagstrom captured this concept in his book, Investing—The Last Liberal Art. It details how you can gain insight on difficult problems by generating a latticework of mental models across disciplines. The “latticework” idea comes from an even more famous source: Charlie Munger of Berkshire Hathaway.

A Latticework of Mental Models

At Sequoia, this concept runs all the way through our history. Most tech enthusiasts know the story of how Steve Jobs famously leveraged what he learned studying calligraphy to make a more personal computer—but what people may not know is how instrumental Steve’s time as a technician at Atari was in shaping his attention to detail. He learned first-hand by watching Nolan Bushnell strive to create an experience that people could actually love.

Today, we see the latticework approach thriving. For instance, when everyone else thought of 3D printing as a mechanical engineering problem, Carbon3D approached it as a chemical engineering problem, and came up with a breakthrough that holds the promise of printing manufacture-ready parts at 100x the speed of traditional 3D printers. In healthcare, Natera took analysis techniques normally reserved for physics and applied it to genetics.

Run a better business

The latticework of mental models can also be used to help you run a better business and manage for change. Many different fields have instructive metal models to offer entrepreneurs and CEOs, but physics is particularly adaptable, as the laws are both universal and apt for metaphor.

Here are a few for your consideration.

Newton’s Laws of Motion

Newton’s first law states that objects in motion tend to stay in motion and objects at rest tend to stay at rest—unless acted upon by a force.

For business, we can think of this in terms of habits and human inertia.

I’m sure you see the negative side of human inertia all around you, where people do things out of habit, regardless of whether it’s the best approach or not. Human inertia can be very bad for business. To eradicate it, CEOs must provide vigorous leadership to challenge their teams to always make the best decisions, instead of falling back on easy habits or old processes. Leaders must reward dexterous innovation. This applies to every department in the company. Every group must innovate.

Is your customer service department innovating? Is your legal team playing offense or defense? Is your go-to-market strategy chasing last year’s trends or anticipating the next pathway to achieve a step-level increase in sales. Innovation shouldn’t just happen inside your product or R&D team, every team must innovate.

While you fight against inertia within your organization, it makes sense to actively encourage it in your customers’ behavior. For instance, a subscription model uses habit and human inertia to generate recurring revenue. Think of all the services you keep paying for every month. Subscription models are human inertia in action—and if your competition has consumers paying without thinking—then your only option is to become the force in the market that causes them to change.

A special note on friction

When you think about Newton’s first law, you have to think about friction. Friction causes an object to slow down and then stop. Friction is the enemy of growth. Every tiny bit of friction you can remove from a sign-up flow will result in new users. Every fraction of a second you can shave off of load time for a mobile app will result in greater retention. Reducing friction has a compound interest effect for user growth.

Newton’s second law of motion is F=MA

Force equals mass x acceleration

This is such a fundamental building block of physics that you can apply it to nearly every situation, but for our purposes, we will focus in on one specific aspect: If you are too big, it will be hard to accelerate.

To accelerate faster, you need to stay lean. I’ve seen some startups hire more people than they need in the beginning thinking that they will, “grow into” the headcount. This is a mistake. Start lean, stay lean. You will never “grow into it.”

Startups can accelerate quickly to produce a big force even with a small size. Startups can maneuver in ways bloated companies cannot.

Ideal gas law

In a system, there is always a balance between pressure, volume and temperature.

But how do you grow without feeling the heat or succumbing to the pressure? You’ve got to expand as you add heat, without stressing the system to the point that it pops.

To get there, take it one step at a time. Launch one product at time in a big market. Reach market dominance, then you go to the next.

Think about Google—Google started with search. They nailed it and then went on to Gmail, and then Android and so on. Never expand to a new product before you have mastered the first. Make sure the unit economics are profitable. Make sure the market is sufficiently large. And don’t add headcount until you absolutely have to. Stay lean.

Get some leverage

Think about a simple machine from physics: the fulcrum. Everyone at a big company thinks their top competition are other big companies. And it’s true: if you have a small company on one side of the fulcrum and a big company at the other, the big company will tip the scale.

However, the right kind of startup, with a fast-moving handle on a true competitive advantage can change the position of the fulcrum and hold incredible leverage over a much bigger foe. NetApp’s biggest threat isn’t EMC, it’s Nimble Storage or other fast-moving startups. If you are a startup, use this power to your advantage. If you are established firm, take notice of these smaller competitors strike while the startups are just getting started. But do not buy the 2nd, or 3rd player. If you do, all you’ll get for your purchase is regret.

The second law of thermodynamics

The second law of thermodynamics describes entropy, a measure of disorder in a system. Systems break down, order becomes chaos.

We see this in the rise of go-to-market strategies that are based on social referrals and peer-to-peer advocacy. It used to be that a company could tightly control the message around a product or service. This is no longer true. 10B interconnected mobile devices puts the power of story in the hands of customers everywhere. You cannot control the message, only support the community and gently guide it. So just as social media can ruin your company over night, it can also make you an overnight sensation. For enterprise sales, this means that the opinions of the developers matter for what gets adopted and what gets left behind.

You can take advantage of this decentralized system. Social selling is replacing TV ads. Eventually customer service reps and call centers will all be united through distributed, decentralized social interactions and peer-to-peer advocacy. Customer care matters more than ever.

Smart brands will be able to view all of the elements of even the most chaotic system and find ways to command their audience’s attention through social amplification.

Summary

1. World is changing. Get used to management for change. Have a different mentality. You can’t keep moving in the same direction or you’ll be left behind. Every department must innovate (not just product and engineering).
2. Stay lean and get nimble.
3. Pressure, Volume, temperature. Grow one product at a time. Get it right, then repeat.
4. Fulcrum—a startup can take down a giant. Be David, not Goliath. Once you do get big, strike fast when a smart startup enters your market. But don’t bother with the second or third best.
5. Second law of thermodynamics: randomness increases over time. Embrace the shift from controlling a message to guiding it through community and peer advocacy. Get ready for a world transformed by social buying.