In his recent book Why Most Things Fail, theoretical economist Paul Ormerod argues that failure is the defining characteristic of biological, social and economic systems. But Ormerod, a former economic forecaster and now principal of Volterra, the London-based consulting firm he cofounded, doesn’t think that’s a bad thing. Giving in to chance, expecting failure and reacting flexibly, he says, is essential to success.

How is the evolution of companies and species the same?

Usually, comparisons between biological systems and social organizations are framed in terms of competition, survival of the fittest, and patterns of success. In my research, I looked at what I think is the most fundamental similarity between biological systems and business failure. The fact is, 99.99 percent of all species that have ever lived are now extinct. And, like species, most firms fail. On average, more than 10 percent of all companies in America disappear each year. How many of the world’s 100 largest industrial companies in 1912 were still in the top 100 in 1995? Nineteen. 

What’s similar about the patterns of extinction in species and in firms?

If you look at extinctions of species over millions of years and extinctions of companies over the past century, you’ll see that they both occur periodically rather than continuously. That is, you’ll see the sudden extinction of many species or companies followed by a period with few extinctions, followed by another burst of extinction.

What’s more, the mathematical relationship between the number of extinctions that occur in a given period and how often groups of extinctions of a given size occur is the same, whether you’re talking about organisms or companies. For example, large extinctions of species happen with the same relative frequency as large extinctions of companies. 

Companies consciously design and execute strategy and so presumably direct their own evolution. Are you saying strategy doesn’t matter?

No. But I am saying that executives overestimate the control they have over the fate of their organizations. If you think of a spectrum of influence in an economic system—say, an industry or regional economy—you’d imagine that the economist’s “rational man,” who has access to all information and makes smart, strategic decisions, would be at one end, and some mindless biological entity, simply mutating at random and proceeding without strategy, would be at the other. In terms of their influence on outcomes, executives are much closer to the biological entity than to the rational man. 

So a carefully planned strategy will be no more successful than a randomly evolving strategy?

That may be true. For example, most people forget that the success of Windows was a fluke. When Windows 1.0 was introduced in 1985, it bombed. It was too big a program to run well on most computers. The Windows support team at Microsoft was cut back to three people.

Meanwhile, Microsoft was totally focused on developing OS/2 with IBM. Microsoft then launched Windows 2.0, and it bombed. Windows was almost abandoned. But, of course, Windows 3.0 took off. I’d say Windows dominates desktops today because of a series of early accidents, not due to a carefully planned strategy. 

If most companies are doomed to fail, and outcomes of strategy can’t be predicted, how can companies improve their odds?

They can start by abandoning business advice that takes the form of “Ten ways to beat the competition,” since it’s impossible to predict the outcome of a given strategy. If there really were 10 rules, everyone would follow them and succeed. Companies should embrace the inherent randomness that drives success and failure and that no amount of cleverness or information can overcome.

The companies that are most able to explore and innovate—something akin to random mutation—and then rapidly and flexibly adapt when an innovation succeeds or fails, will do best. I know the New Coke story is told too often, but it’s relevant here. Coke reacted rapidly and flexibly to the disaster, abandoning its meticulously crafted strategy. Imagine if Coke had stuck rigidly with its plan because that was its carefully considered, predetermined strategy? 

• Gardiner Morse is a senior editor for Harvard Business Review.

Real Leaders Negotiate

Good leaders are invariably effective negotiators. After all, authority has its limits. Some of the people you lead are smarter, more talented and, in some situations, more powerful than you are. In addition, often you’re called to lead people over whom you have no authority, such as members of commissions, boards and other departments in your organization.

Set Up To Fail: Economist Paul Ormerod on strategy and extinction

In his recent book Why Most Things Fail, theoretical economist Paul Ormerod argues that failure is the defining characteristic of biological, social and economic systems. But Ormerod, a former economic forecaster and now principal of Volterra, the London-based consulting firm he cofounded, doesn’t think that’s a bad thing.

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Pay it forward

The Force of the Weak

In high-stakes decisions, sometimes you’ve just got to go with your gut

Managers and entrepreneurs face high-stakes decisions throughout their careers. Should they pursue a new market? Enter into a joint venture? Make a high-profile hire?  When so much is unknown and unknowable, conventional wisdom says to go with your gut.