The Innovation Show

The Seneca Effect, also known as the Seneca Cliff or Seneca Collapse, is a concept named after the ancient Roman philosopher Lucius Annaeus Seneca. The effect is based on Seneca’s quote, “Fortune is of sluggish growth, but ruin is rapid.” He observed that many things in nature, including human affairs, systems and civilisations, tend to decline much more rapidly than they ascend. 

The concept serves as a warning and a reminder of the importance of sustainability, resilience, and the careful vigilance of complex systems. It stresses the potential consequences of unchecked growth, unsustainable practices, and the need for long-term thinking to avoid the effects of a sudden decline.

In my workshops, I illustrate The Seneca Effect with a hot air balloon analogy. 

Rise and Fall

A hot air balloon works by heating the air inside the balloon using a burner. The heated air inside the balloon makes it lighter than the cooler air outside. This contrast causes the balloon to rise and float like an object floating in the water. To maintain altitude, the heater must continually heat the air inside. If the heated air is allowed to cool, the balloon gradually descends. 

Balloon pilots control altitude with various instruments. Experienced pilots develop exceptional anticipation skills. Balloons cannot be steered in the usual sense of the word, so they travel in the direction of the wind, which varies at different altitudes. Pilots skillfully use the wind to change direction by harnessing various air streams.

This concept of control and anticipation in hot air ballooning can be related to the Seneca Effect. While the ascent of the balloon is a gradual process, the descent can be swift if the heated air rapidly cools or other factors change quickly. The balloon pilot’s ability to foresee and manage the descent is crucial to successful navigation. Like a hot air balloon, in the broader context of complex systems like businesses, the Seneca Effect reminds us that a rapid decline can follow a period of gradual growth. It emphasises the importance of anticipating and addressing factors that may lead to a downfall and the need for proactive management and sustainability practices to maintain long-term success.

A business rises like a hot air balloon due to the energy that drives it upward. In the case of a business, this energy can come from numerous sources, such as new products, services, or technology that drive growth and expansion.

However, like a hot air balloon, a business must continue to generate this heated air to keep rising. If a business does not continue to innovate and adapt to changes in the market, it will lose momentum and eventually fall. This happens when organisations cut spending on R&D, upskilling their workforce and monitoring the changing business landscape. 

In business, executives must navigate a dynamic environment, adapting to market trends, consumer preferences, and economic conditions beyond their control. Like balloon pilots adjusting altitude, business people make strategic decisions based on market insights and emerging trends. They must also jettison unnecessary “dead weight” to maintain altitude. In business, dead weight can be underperforming employees, defunct business models, mental models and jaded business practices).

To bring this analogy to life, consider the case of Levi Strauss, a coveted brand during my adolescence. This is a case covered in our latest episode of The Innovation Show with the author of “Stall Points, Most Companies Stop Growing – Yours Doesn’t Have To”, Derek van Bever. 

Levi Strauss: The Success Trap

“The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” – William Pollard

In the early 1990s, Levi Strauss enjoyed surging revenues even as its relationships with “The Gap” and other distributors faltered. Levi saw designers and retailers introduce denim products at both the high and low ends of the market. Levi Leadership believed they could navigate the tumultuous environment, despite the rising storms of house brands and superpremium designer jeans – as long as healthy revenue growth continued. By the time the growth stall had become evident, the company had an expensive retailing strategy and a product line that was out of sync with both ends of the denim jeans market.

Like most cases of business failure, it is rarely a case that leadership did not see the storm brewing, but rather they chose to ignore the signals or convince themselves it was a passing storm. Market data pointed to a coming stall for Levi executives, but years of success warped their interpretation of what they saw. The case illustrates how difficult it is to proactively respond to a threat without a looming burning platform: If your sales continue to rise, how do you focus on concern? After the stall in 1999, Gordon Shank, then the company’s chief marketing officer, admitted ruefully, “We didn’t read the signs that all was not well. Or we were in denial.”

Although the onset of premium-position captivity is gradual, there are often clues that trouble is afoot, both in the external market and executive attitudes and behaviours. Easiest to spot in marketing data are pockets of rapid market share loss, particularly in narrow customer segments, and increasing resistance among key customers to solutions wrappers and bundling of services. Focusing on metrics different from those you ordinarily emphasise can also be revealing. If you usually track profit per customer, you are content when it rises. But would you notice if customer acquisition costs increased even more rapidly?

When it comes to management attitudes: listen closely to the tone in the executive suite when the conversation turns to upstart competitors or to successful rivals that are viewed as less capable or not a threat. Is it acceptable, or routine, to dismiss them as unworthy? Do you know if your competitor analyses ignore some market participants because of their size or perceived lack of quality? Indulging in such a practice is common, but it’s no longer a luxury market leaders can afford.

The business literature is littered with case studies of organisations and their executives who ignored the signals, especially when making progress. 

For this Thursday Thought, I will leave you with some examples:

“Sears doesn’t have any competition save ourselves. Sears is number one, two, three and four. Take our sales and divide them by four, and we are still bigger than the next guy.” Planning director, Sears, Charlie Meyer, 1975

“Komatsu products are priced 10 to 15 below Caterpillar. That says clearly what they believe our value is versus theirs.” Chairman Lee Morgan, 1981

“Five hundred dollars? Fully subsidized? With a plan? I said that is the most expensive phone in the world and it doesn’t appeal to business customers because it doesn’t have a keyboard. Which makes it not a very good email machine.” – Steve Ballmer, Former Microsoft CEO

“There is no reason anyone would want a computer in their home.” Ken Olsen, founder of Digital Equipment Corp., 1977 (the year after Apple introduced the personal computer)

“Anyone who thinks old-fashioned folded maps are going away should think again. It’s kind of like saying newspapers are going to disappear.” – Robert S. Apatoff, (former CEO of iconic mapmaker Rand McNally in a 2006 interview)

And, last but not least:

“We didn’t do anything wrong, but somehow, we lost…” – Former Nokia CEO, Stephen Elop, During a 2016 press conference to announce Microsoft’s acquisition of Nokia for a fraction of its former value)

Thanks for reading.

The winner of “The Microstress Effect” by Karen Dillon is Lesley H. Lesley, I will drop you a line to organise delivery. 

Our next book competition is to win a copy of “Learn to Build” Bob Moesta.

Check out “Stall Points” by Derek van Bever below: