Monday Mornings with Madison

The Butterfly Effect on Business, Part 1

Word Count: 1,579
Estimated Read Time: 6 min.

The marvels of creation attest to the Creator, as it is simply impossible for any human being to have orchestrated all these minute details. Without minimizing this in any way, we will now explore the scientific theory called the Butterfly Effect and how we can apply it to business.

A small part of “Chaos Theory” says that something as small as the flutter of a butterfly’s wing can ultimately cause a typhoon or tornado halfway around the world.  This was dubbed the “butterfly effect.”  At its core, this concept recognizes the sensitive interdependence of conditions in which a small change in one place or system can result in large differences later and even affect other systems.

Noticed by scientist Edward Lorenz in 1961, the concept explains how the details of a tornado (the exact time of formation, the exact path taken, etc.) can be deeply influenced by miniscule agitations such as the flapping of the wings of a distant butterfly several weeks earlier or one flap of a sea gull’s wings.  Lorenz discovered the effect when he observed that runs of his software weather model with initial condition data that was rounded in a seemingly inconsequential manner would fail to reproduce the results of runs with the unrounded initial condition data.  An infinitesimally small change in the initial conditions created a significantly different outcome.  How small?  Well, Lorenz was running a numerical computer model to redo a weather prediction from the middle of the previous run as a shortcut. He entered the initial condition 0.506 from the printout instead of entering the full precision 0.506127 value which he ran originally.  It was a change as small as one ten thousandth of one percent.  The result predicted a completely different weather scenario.  The further out the prediction, the bigger the effect.

This idea — that something as small as butterfly’s wings might create tiny changes in the atmosphere that can ultimately alter the path of a tornado or delay, accelerate or even prevent the occurrence of a tornado in another location weeks or months later – is very powerful.  The butterfly does not control or directly create the tornado.  Instead, the flapping wing represents a microscopically small change which then cascades to large-scale alterations of events… similar perhaps to the domino effect or the ripple effects of a pebble being thrown into a pond.  Had the butterfly not flapped its wings, the trajectory of the system might have been vastly different.  But, it is also equally possible that the set of conditions without the butterfly flapping its wings is the set that led to the tornado.

So does the concept of the Butterfly Effect impact business?  If so, how?  The concept is used to explain the broader idea that we are all interconnected and that the borders of companies and countries are porous.  Problems in one area spill over to others.

The Butterfly Effect and Systems

We live in a complex world.  Most things in life are parts of larger systems, where various parts of the system interact and affect various other parts of the system.  This does not just happen in weather systems and nature.  It happens in all kinds of systems.

Consider the human body.  It has various systems that work together to sustain life. For example, the cardiovascular system (with the heart, veins, arteries, capillaries and blood) carries oxygen and nutrients throughout the body.  The neurological system supports movement, response to stimulus, and decision-making.  The digestive system (mouth, esophagus, stomach, intestines, etc.) supports digestion.  The list of systems in the body goes on and on.  If any one of these systems (or any part of any one of these systems) is not working properly, the body suffers disease, disability, or some form of dysfunction that affects lifestyle or life.   Even something as seemingly mundane as periodontal disease (an infection in the gums) can ultimately cause a heart attack.  How?   Gum disease can cause bacteria to enter the bloodstream where it is believed to attach to the fatty deposits in the heart blood vessels. This condition can cause blood clots and can lead to cardiac arrest.  So poor dental hygiene can cause a heart attack!  That is the butterfly effect.

In automobiles, various systems work to enable the car to operate – the fuel system, the transmission system, the braking system, the heating/cooling system, the GPS navigation system, and so forth. All parts of the car work in tandem to make the vehicle operate, and if any one of them to fails, the car will not perform (or not perform well).   A simple leak in the radiator, for example, can cause the car engine to overheat.  An overheated car engine can crack the head gasket causing severe damage and even lead to engine failure.  That is the butterfly effect.

In cities, a multitude of systems work to enable a community to function smoothly – transportation, energy, government, education, etc.   The transportation system ensures that roads and mass transit are functional so that people can get to and from work.  The energy system ensures that we have electricity to power computers, methods of transportation, communications, etc.  Education ensures that people have the knowledge and skills to function within the community.  Government provides the laws and order to ensure that people interact in ways that are beneficial for everyone.  If just one of those systems malfunctions, such as a blackout caused by a power failure or the abuse of power by the police, it can throw the entire city ecosystem into chaos, leading to riots and major property damage.  That is the butterfly effect.

In business, every company is its own small ecosystem comprised of a series of systems including Accounting, Sales, Marketing, Technology, Physical Plant, Operations, Customer Service, etc.  Those systems, or departments, work together to create and deliver products or services to people, and provide employment to staff.  In each company, people, information, and processes work together to make an organization healthy or unhealthy.  So “systems thinking,” then, is – in a sense — the process of understanding the butterfly effect… of understanding how things influence one another within a whole.  And, then, those companies fit in to the larger and ever-more complex economic ecosystem in which business and markets interconnect.

Applying the Butterfly Effect to Business

That broaches the question of if and how the butterfly effect might impact business.   Just consider the butterfly effect on the simple concept of networking.  The people we meet can have a profound impact on our lives, but not the same impact on every person.  A casual meeting with a new individual – a person in an elevator or on an airplane or at a seminar — can have a major long-term effect on the person’s life.  At every turn in the road of life, there are individuals who may extend a hand to help someone up or push the person down.  Guide the way or block the path.  Give good advice or point in a bad direction.  Boost the climb or break the stride.  These interactions can have a butterfly effect.

Case in point.  Warren Buffett, known now as the Oracle of Omaha and one of the wealthiest investors in the planet, applied to Columbia University as a young man.  The Admissions Officer at Columbia sent Buffett a rejection letter.  Buffett then applied to Princeton University.  This time, he was accepted.  By then, most of the courses that he wanted to take were already full. Finally, he settled on one course taught by a Professor Fisher on Value Investing. Because he was young and impressionable, Warren Buffett absorbed Fisher’s ideas on how to choose stocks for the long term.  After earning his degree, Buffett returned to Omaha, Nebraska (not Wall Street) and began investing for himself and others.  Today, Warren Buffett is one of the richest men in the history of the world.  He is still applying Fisher’s ideas to buying and holding good quality stocks.

Buffett came into contact with two men.  The Columbia Admissions Officer blocked his path.  The professor at Princeton gave him good advice.  Buffett’s rejection by Columbia University was a tiny decision, but over time, it had a profound impact on his life.  Perhaps if he had attended Columbia and taken other classes, his path in life might have been different?  Or, if he hadn’t registered late, he might have been able to take other classes at Princeton leading to a different career?   There were certainly many other students who took Fisher’s course on Value Investing that semester, as well as before and since, but they did not go on to become billionaires.

How many times does a person’s direction in life change because of meeting and interacting with another person? Sometimes a single observation or bit of advice from someone with more experience at a particular area can change the person’s course or trajectory.  Perhaps a single conversation can spark an idea or insight that can inspire an invention or lead to a different career path.  That is the power of the butterfly effect.  And that means that leaders, managers and salespeople can have a tremendous impact on the people they interact with and influence.

Next week, we’ll consider what the butterfly effect might be on an organization that introduces a new product or service without thinking through the impact of it on existing products and customers?  Or an engineering team reacting to a design defect by changing a spec, but not considering what impact that might have on quality, warranty claims, customer complaints in the call center and other performance measures? Or a manager who changes a staffing schedule because of workforce shortages without considering how this might impact customer service and operations?  This is where the law of unintended consequences might kick in.   Don’t’ miss it!

Quote of the Week

“It used to be thought that the events that changed the world were things like big bombs, maniac politicians, huge earthquakes, or vast population movements, but it has now been realized that this is a very old-fashioned view held by people totally out of touch with modern thought. The things that really change the world, according to Chaos theory, are the tiny things. A butterfly flaps its wings in the Amazonian jungle, and subsequently a storm ravages half of Europe.” Neil Gaiman


© 2018, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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