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Cells As Firms

In imagining & visualising economic systems, especially the firm, there’s a lot of metaphors that have been used in the past. For example, firms as culture, or firms as machine. One that I particularly enjoy that I haven’t seen mentioned in depth at all, is seeing the firm like biological cells.

The basic premise is to imagine the cell as a firm, with the cell membrane as its boundary, competing in the primordial soup that is the market against other cells (as firms). Inside the cell, it contains its own biochemcial activity such that it generally excludes the outside world. Through this membrane, in providing protection, it was not only possible for increased complexity to occur within its own biochemical activities, but also allowed it to selectively exclude its own internal mutations.

There’s many things that happen in cells that have parallels in firms.

Cells

Cells can be divided into two broad categories: prokaryotes (single-celled) or eukaryotes (single or multi-celled, but importantly containing a nucleus).

animal cell structure en svg

Prokaryotes are simple, containing one chromosome in its cytoplasm.

Eukaryotes are more complex containing different compartments and functionality within it.

I see prokaryotes as simple firms: things like single proprietors or lifestyle businesses. It’s barely removed from the market itself.

Eukaryotes are more complex firms: LLCs, corporations and so forth. Different organelles within it represent different business functions such as HR, accounting, design, etc. In the cytoplasm, the different components work together to reduce transaction costs it would’ve had to undertake separately in the chaotic primordial market.

In both prokaryotes & eukaryotes, the membrane protects its activity inside from the market outside. It is selectively permeable: allow some components in and some components. In a similar manner, a firm, through its boundary keeps certain activities inside, and some activities outside of it. Only some inputs are allowed through.

A cytoskeleton keeps all its components in place, especially in eukaryotes, keeping the organelles in check. This can be seen as either the legal instantiation of the firm or its board.

Genetic Material & Memory of the Firm.

Cells contain genetic material: DNA and RNA. DNA can be regarded as the long-term artefacts and memory of the organisation. Were it to merge or split, these documents would represent its stored memory.

RNA catalyses some biological reactions, controls gene expression and senses and communicates responses to cell signals. This can be regarded as the tools the organisation uses. Slack is RNA. E-mail is RNA. It both simultaneously encodes information and it is necessary for processes to happen. It transcribes the long term information into forms that can be processed. Conway’s Law comes to mind here:

“organizations which design systems … are constrained to produce designs which are copies of the communication structures of these organizations.”

Organelles & Departments

In eukaryotes, organelles are specialized functions in a cell. Amongst some of them, here is how they relate to the firm.

For example:

The nucleus is the information center: the database/server of the organisation, containing its information (DNA) and tools to process it (technology and software).

Mitochondria and Chloroplasts generates energy and in the case of a firm is what takes in cash (oxygen) and turns it into more specific services within the firm (paying employees to do functions). Mitochondria replicates through binary fission (splitting), which is a metaphor for the fungibility of cash.

Endoplasmic reticulum & Golgi apparatus are transport, processing and packaging elements of a cell. This is the operations side of the cell. These are general processes and services that package and transport information in an organization. It’s your weekly CEO fireside and stand-ups.

Lysosomes and Peroxisomes are the garbage collectors. This is HR, Legal and Finance processing the off-boarding of teams, projects and individuals.

Enzymes & Transaction Costs

Enzymes are catalysts that allow chemical reactions to accelerate. Without enzymes these reactions take substantially longer to occur. From wikipedia:

“An extreme example is orotidine 5’-phosphate decarboxylase, which allows a reaction that would otherwise take millions of years to occur in milliseconds.”

Enzymes aren’t involved in the reactions themselves. Thus, it is not like a tool, where it is sometimes necessary to get a certain outcome.

In a firm it can be regarded as processes or environments that facilitate exchange and production such that if it the production were created in market itself, it would be too costly (in time and resources). It lowers the “activation energy”. Think of it as something like a brainstorming session (being one kind of organizational enzyme), which acts as a framework for discussion such that it produces novel ideas much faster and more efficient than the market’s own chaotic production would.

Enzymes act as catalysts in three primary ways:

  • Stabilising transition state (in a firm: processes providing stability for invention/production. eg a meeting).
  • By providing an alternative reaction pathway (in a firm: processes involving novel or purposeful habit-breaking production. eg submitting ideas straight to CEO vs bubbling it up).
  • By destabilising the substrate ground state (in a firm: actively re-orienting. eg transfers within orgs).

The thermodynamics of a reaction act relatively similar to common functions in a organization. It first has to be organized (binding to substrate), then react (catalyse), then generate outputs (products). For example: setting up a meeting, having the meeting, then having next steps. The thermodynamics in these reactions also align:

  1. Little energy to set up a meeting.
  2. Highest effort expended in meeting.

enzyme catalysis energy levels 2 svg

Different enzymes catalyze different reactions. In some circumstances, inhibitors can bind to an enzyme, stopping the catalysis from occurring.

A crude example is a constant talker taking up the space in a meeting resulting in less being done if the meeting didn’t take place at all. Because the meeting exists, and acted as substrate, this constant talker fit into it, and acted as anti-catalyst for other novel production.

Metabolic Pathways & The Conveyor Belt

glycolysis metabolic pathway svg

Enzymes like any process in a organization is often chained. For example, Waterfall development ideology acts in stages, taking an idea from inception to market. This is akin to a metabolic pathway, and could be regarded as an overarching process or “conveyor belt”.

metabolic metro map  no legends  svg

All throughout a business, different processes produce different products which are used and re-used in other processes.

Gene Transfers: Outsourcing, IP & Mergers & Acquisitions

Besides replication, like firms, cells can transfer information across (laterally).

Horizontal Gene Transfer “is the movement of genetic material between unicellular and/or multicellular organisms other than by the (“vertical”) transmission of DNA from parent to offspring (reproduction).”

This is done through processes called transformation, transduction or conjugation.

Transformation is “is the genetic alteration of a cell resulting from the direct uptake and incorporation of exogenous genetic material from its surroundings through the cell membrane(s).”

This can be regarded as an acqui-hire or poaching of talent.

Transduction “is the process by which foreign DNA is introduced into a cell by a virus or viral vector”.

The closest correlation is a hostile takeover.

Conjugation “is the transfer of genetic material between bacterial cells by direct cell-to-cell contact or by a bridge-like connection between two cells. This takes place through a pilus.”

A correlation to this is a joint-venture or SPV. A project that two firms temporarily undergo for mutual benefit. Consulting or contracting could also be seen as conjugation.

Cells & The Boundary of the Firm

Internally, a cell is still restricted by its own processes, much like a firm does too. At some point, marginal return for additional resources does not result in increased output. For example, the classic idea of adding an additional member on the team won’t make the product ship faster.

In enzyme-induced reactions, increasing the substrate concentration (places to bind) increases reactions, until a point of saturation:

michaelis menten curve 2 svg

In firm parlance, it’s the principle of: having more meetings increase production and coordination, but after a while, any additional meetings does not produce the same returns anymore. This remains a fundamental constraint.

Externally, cells can replicate. Cell division is the splitting of the firm. It either happens through fission (creating a copy) or mitosis (splitting). For firms, this feels like franchising or retail expansion (fission) vs mitosis (which is the splitting of a firm into two or more: eg EBay spinning of PayPal). PayPal still contains DNA from EBay within it, but now floats on its own in the primordial market.

Fundamentally, if this metaphor holds then there could be clues to helping resolving this fundamental question: when/where does a firm end? What should be in-house? What should be out-sourced? Should organizations merge or should they be split up?

Nature has evolved its own tiny firms for millennia. What can we take from it to understand how to design our firms?

In mitosis, a cell on a specific cycle goes through different phases towards eventually splitting and reproducing. In order to determine whether it should proceed on this cycle, different checkpoints regulate this process: either continuing or ending in arrest. These checkpoints are basically damage checks or checksum checks in software.

The only difference here is that firms don’t have a planned cycle to them. However, the idea of assessing “damage” as a checkpoint might be a useful metric to gauge where the boundary of the firm should be. “Damage” in a organization could be regarded as entropy that has been built up by how long it’s been alive. Old documents, technical debt, poor HR, etc. If these build up, the firm will go into arrest.

Thus: if a firm would follow a cell, it serves that it should eventually aim to split in order to reduce likelihood of damage build up. Internally, seeing a team as a cell, this could be regarded as the idea to not have teams be larger than having two pizzas feed them (as per Jeff Bezos’ belief).

How one measures ‘damage’ build-up in a org is uncertain. We do know that adding more resources, eventually reduces its ability to function as-is (eg, not everyone in a company has a working relationship with everyone else). It has to internally split into different functional units, regardless of whether it should externally split.

Firms don’t readily aim to split up as a whole. The reason I feel, is that firms adapt internally as needed without relying on random mutation to improve. Would Amazon benefit if it aimed to fork into Amazon1 and Amazon2? Maybe? If both firms owned 50% of the other? However, a company like Amazon relies on economies of scale. Over time, however, perhaps a split like this necessary is what is necessary to on the longer time-scale beat out competition. Put another way: if Amazon split into two, both might lose against a competitor, but would they keep their prominence regardless? That’s not a clear answer.

Perhaps a different question to ask: what IF we designed firms more like cells? They have a planned lifecycle upon which if the checkpoints match up, it will split. Firms that are more like cells are temporary firms such as movie production crews. They have a planned lifecycle: once done and it had enough resources (box office), sequels happen.

This metaphor starts breaking down at certain points. I am not even sure if all the metaphors I used fit into the right parts of a cell. Would love to hear if you have any thoughts and ideas on the expansion of this metaphor! Please share in the comments.

Regardless, I found it novel to view firms in different ways. I believe this rabbit-hole doesn’t stop here. There’s a lot to piece together on how firms can work together, by paying attention to biology (biomimetics). For example: conviction voting treats decision making more like some parts of nature do.