Transcript selection

Organizations as Evolutionary Systems
Daniel Levinthal
Wharton School, University of Pennsylvania
Sustained Competitive Advantage
Owning just survivors would have yielded a 20%
lower return than owning the S&P
74 firms
S&P 500 in 1957
Foster and Kaplan (2001)
1997
Only 12 outperformed
S&P 500
Challenge for Strategic Management
• What is the problem? What are our
expectations?
– Immortality
– Sustained competitive advantage
Competitive
advantage
Competitive
advantage
time
time
“It’s not the strongest of the
species that survive, not the
most intelligent , but the
one that is most responsive
to change.” Charles Darwin
The ability to learn faster than your
competitors may be the only
sustainable competitive advantage
Ray State (CEO Analog Devices)
Arie De Geus (Head of Strategic Planning Royal Dutch Shell)
Peter Senge (author of the 5th Discipline)
OODA loop (observe, orient, decide, and act)
John Boyd (USAF Strategist)
Exploration - Exploitation
• Fundamental tension for evolving
entity
– Adaptation in Natural and Artificial
Systems (Holland, 1975)
– Need to survive in the present and adapt
in ways that enhance survival in the
future
• Why the need for adaptation for the
future?
– Opportunity to improve via search over
complex problem/opportunity space
– Changes in the problem/competitive
context itself
Nested Levels of Selection
Environment
Niches
Selection criteria
Selection pressure
Org A
Org B
Nested Levels of Selection
Environment
Niches
Selection criteria
Selection pressure
Org A
a1 a2
a3
Org B
a4
a5
Selection of projects and routines
within the organization
Three Challenges to the Problem of
Organizational Evolution
• Problem of interim selection
• Problem of selection criteria
– Diversity
• From “Dynamic Capabilities” to Dynamic
Organizations
Problem of Interim Selection:
Evolutionary Dynamics
QGTs
Selection
Environment
Genotype versus Phenotype
• Fixed genetic structure need not imply fixed
form
– Adaptation at the individual level
– Developmental expression of genotype
Unpacking Construct of
Routine-based Action
(Levinthal and Marino, 2012)
• Gene
– Carrier of inheritable traits across time
• Phenotype
– Expression of the “form”
– Some degree of loose coupling to gene
• Plasticity
– Unique re-enactment of “routine” based behavior
• Feldman (2000), Birnholtz, Cohen, & Hoch (2007), Cohen,
Levinthal, and Warglien (2012)
– Selection operates directly on phenotype (and only indirectly on
the gene)
• Myopia of selection (Levinthal and Posen, 2007)
Explicitly myopic
Products
Product
markets
Selection
Environment
QGTs
Market share
Patents & new
products
Financial
markets
Forward-looking but conditional
on current outcomes
Performance
Selection
Unfolding of alternative
search strategies
Time
What does it mean to be a good “type”?
• High profits conditional on survival

Implicit criteria of business press accounts
• Higher probability of survival

Implicit criteria of population ecologists
• Highest average (across a particular strategy) for all organizations

Implicit criteria for learning theorists
Intermediate Selection
Levinthal and Posen (2007) “Myopia of Selection”, ASQ
• When is this most critical?
– Early in an organization’s life
• Most vulnerable to selection forces
• Most plastic with respect to developmental processes
• Importance of considering in detail both the nature
of developmental paths and the nature of selection
– Search strategies, resource endowments & temporary buffering from
selection
• Selectability: Informativeness of current fitness
for future fitness
Challenge of Intermediate Selection:
Valuation of Stage-Setting Moves
• Learning in the absence of [immediate] feedback
(Fang, Denrell, and Levinthal, 2004, Fang and
Levinthal, 2009)
– Samuels (1958): machine learning for checkers
• Reward ‘stage-setting’ moves as opposed to full paths or
ultimate outcomes
– Need for mental models for evaluation of intermediate
states
– Learning in labyrinths versus t-mazes
• Emergence of routines as a mechanism to address intertemporal dependencies
Real Options
• Initial “stage-setting” investments may give the firm
privileged access to subsequent follow-on
investments
– New product development
– Initial plant in an emerging market
– Rights to distribute a new movie
Realization of
Uncertainty
State-setting
Investment
Stage 2
Investment
Intermediate Selection &
Real Options
• Real options as panacea for innovation
strategy in an uncertain world
• Problems of selection and real options
(Adner and Levinthal, AMR 2004)
– Challenge of updating and evaluation
– Impossibility of proving failure
– Costs of imposing sufficient constraint to make
innovative efforts conform to a real option
Challenges of Experimentation:
Problems of Variety
• Variety of ideas & initiatives
– “let a thousand flowers bloom” Rosabeth Moss Kanter
• Challenge of sustaining hetereogentiy of selection
criteria
– Organizations have sufficient resources to make multiple
bets but struggle to act with multiple minds
• Does size matter? (Posen, Martignoni, Levinthal, 2012)
• Iron law of hierarchy (Michels, 1911)
Internal Ecology
(Levinthal and Marino, 2012)
• Organizational adaptation as aggregate property
– Plasticity of individual routines may or may not be adaptive
for the aggregate entity
• Flexibility
• Reliability
• Selectability
– Degree/intensity of internal selection forces
?
• Plasticity
Dynamic capabilities
Grand Synthesis: Link Intelligent
Design and Emergence
• Engineering of evolutionary processes
– Balancing exploration and exploitation
• Holland (1976) and March (1991)
– Nested levels of selection
• Natural and artificial selection environments
• Within group versus across group selection
• Choice processes in evolutionary theories
– Proteins versus people climbing fitness landscapes
• Cognition: Gavetti and Levinthal (2000)
• Social/population learning processes: Bandura (1977), Miner
and Haunschild (1995)
– Incentives and self-interest
• Landscape design: Levinthal and Warglien (1999)
Return to Darwin & Mendel
• Our thinking about growth and decay is dominated by
the image of a single lifespan, animal or vegetable.
Seedling, full flower and death. “The flower that once
has bloomed forever dies.” But for an ever-renewing
society the appropriate image is a total garden, a
balanced aquarium or other ecological system. Some
things are being born, other things are flourishing, still
other things are dying --- but the system lives on
John Gardner (1972)
– Silicon Valley
– Internal ecology of organizations
Small Steps on a Long Journey