The Natural Laws of Business by Richard Koch


  1. The author walks us through some of the key ideas in various disciplines and how we can better understand how to apply them in a business context.

Key Takeaways

  1. Natural Selection
    1. Darwin coined the phrase “natural selection” as the “preservation of favorable variations and the rejection of injurious variations…The slight advantage in one being…over those with which it comes into competition or better adaptation in however slight a degree to the surrounding physical conditions, will turn the balance.”
    2. Creatures systematically overproduce their young, all creatures vary, the sum of that variation is inherited
    3. Success means fitting the conditions of life
    4. Darwin is a better guide to competition than economists
    5. Scatter new breeds around your core product – fill up the potential product spaces so that newcomers can’t move into these niches
    6. Fisher found that the larger the variance in fitness, the faster the average growth of the population. Greater variation implies greater improvement and therefore faster growth
  2. Learning = doing better things with fewer resources
  3. Competitive Exclusion – each separate niche sustains just one specialized type of plant or animal
    1. Your firm needs unique niches, places where no one else can go because they aren’t exactly like you
    2. “Competitors who prosper will have unique advantages over any and all competitors in specific combinations of time, place, products, and customers. Difference between competitors is the prerequisite for survival in natural competition. These differences may not be obvious. But competitors who make their living in exactly the same place at the same time own’t prosper.” – Bruce Henderson
      1. Goes to Porter’s point about being unique
    3. If you can invade your competitor’s niche and the competitor can’t, you should
  4. Humans are wired for fairness above efficiency
    1. “It is a  rule of evolution..that the more cooperative societies are, the more violent the battles between them. Humans may be among the most collaborative social creatures on the planet, but we are also the mos belligerent.” – Matt Ridley
  5. Game Theory
    1. The main lesson is how to cooperate effectively in pursuit of entirely selfish ends. Game theory started when von Neumann published his mathematical Theory of Parlor Games in 1928. Game theory deals with games where your chances of winning depend no what your opponent does, and vice versa; it attempts to simplify the world and produce the best mathematically derived outcome for any particular situation. Along with Morgenstern, they invented the concept of the non-zero-sum game, where it pays to collaborate and form coalitions
    2. Cooperation is about comprehending how to make the pie bigger, on the understanding that when we have to divide it, we will behave reasonably, within the context of a long-term relationship
    3. What accounts for tit-for-tat’s robust success is its combination of being nice, forgiving, and clear. Its niceness prevents it from getting into unnecessary trouble. Its retaliation discourages the other side from persisting whenever defection is tried. Its forgiveness helps restore mutual cooperation. And its clarity makes it intelligible to the other player, thereby eliciting long-term cooperation. – Anatol Rappoport
    4. The currency of cooperation is commitment, trust, and love
    5. Cooperate with the best cooperators, build a reputation as someone who is totally trustworthy, always cooperate first, be willing to take turns in extracting advantage, cooperate daily (cooperation is the highest form of self-interest)
  6. Newton
    1. From Newton’s 3 laws (inertia, F=ma, reciprocation), and Galileo’s law of uniform acceleration, Newton arrived at the concept of gravity
    2. Competition is the economic equivalent of gravity. Just as gravity depresses objects and stops stars from moving in a straight line, so competition depresses returns on capital. “Margin gravity” depresses managers and investors. The extent of margin gravity is proportional to the proximity and power of competitors. Weak gravity indicates to distant or tangential competitors. Strong gravity implies close, in-your-face-challengers…If we increase the distance between us and our competitors or increase relative size, the impact on profits will be non-linear. Increase the differences in your stages of value added and in the customer types, product types, and geographic regions that you serve
  7. Time
    1. Einstein’s challenge is this: think of time, or the reduction of time, as part of what you offer customers. Think product-time. Think service-time. It’s all part of the same thing. Never think “product” or “service” independent of time. Time is a key dimension that must be embraced to achieve success
      1. Velocity
  8. Recursion
    1. Godel demonstrated that, even in a very simple system like arithmetic, statements could be written down that could neither be proved nor disproved within the rules of that system. Any consistent numerical system generates formulas – like “a number is equal to itself” or “zero is a number” – that cannot be proved, except by importing axioms from outside the system. Godel’s proof was not confined to mathematics. Reality, he demonstrated, is a construct, not a given. One implication is that the very process of thinking adds to what we think about…so the process can never be completed. No finite language or system can capture all truth
  9. Complexity
    1. Discovering causes of poor performance may be less productive than trying a whole new experiment as there may be too many variables to isolate, initial conditions will always vary, etc…
  10. 80/20
    1. Most things have negative value. Best way to become more effective, rich, efficient, etc. is to stop thees negative activities – achieve more with less, apply the 50/5 principle and then move onto the 80/20, make things as simple as possible, identify the scarcest, most valuable resource in your organization, think about and measure value subtracted as well as value added
    2. Alliances > Acquisitions
    3. Own less, do less, but more profitably – always consider “Return on Time and Effort Employed”
  11. Path of Least Resistance –> Principle of Least time
  12. Often the easiest and simplest innovation opportunity lies in the unexpected. The unexpected is often a tremendous clue to developments that are reaching their tipping point. It is very much cheaper and more effective to latch onto social trends that are already developing, rather than to try to create them from scratch. If something unexpected is happening, this means that an unplanned trend is at work. Exploit it to the fullest!
  13. Arbitrage – consistently seek to move resources to where they can be most productive. This type of arbitrage is easier than innovation. Everyone should be capable of something that could benefit from economic arbitrage, or identifying resources that could be used more effectively
  14. Increasing returns
    1. Typically appear when a system has high up-front costs, network effects, customer groove-in
    2. Two long-standing rules of business strategy have only become more important: do whatever is necessary to move ahead of competitors, and cut your losses when someone else has reached that point. To these we may add 2 new rules: 1) identify and dominate the industry sweet spots by establishing new standards there, orchestrating others to do the donkey work in the bulk of the industry, and 2) defend the dominance by dividing and ruling the orchestrated, and by continual innovation to find the next industry sweet spot
    3. Aim to create the new standard, the standard of value
    4. Don’t play in network markets unless you can win
  15. The theory of second best
    1. Reaching an optimal outcome in individual markets may lead to a suboptimal overall outcome. For example, if free markets led to an optimal position in all individual product markets, but left an economy with 40% unemployment, this would not really be optimal. The theory therefore says that instead of seeking optimality in each part of the economy, we should go for the best overall solution, which may imply “second best” solutions in individual markets. Stripped of economists’ usual obsession with equilibrium and optimality, two very elusive goals, the theory of the second best is really just saying that the economy is a system, and that actions in one area may have unintended consequences in another. It is a useful idea because it tells us that we may have to compromise, and that pursuit of one objective may be myopic, like the speed bumps.
  16. Set clear, explicit, positive, and multiple goals. Pursue several goals at once
  17. Microsoft is an ideal model for any type of business: a dictatorship of ends, a meritocracy of execution, and a collegiate “democratic” style that respects intelligence and insight at every level, so long as it does not challenge the basic strategy

What I got out of it

  1. A true “latticework” of a book. Love how Koch was able to tie together disparate ideas into a business context. The “how to apply” section at the end of every chapter was great too!