Strategy at the edge of chaos: 5 critical aspects of being a good evolver.

Strategy at the edge of chaos

EXTRACTO DEL ARTÍCULO DE by Eric D. Beinhocker para MacKinsey Company

"Fishbowl" economics once provided the basis of corporate strategy. No more
New theories show markets are "complex adaptive systems"
Making your company an evolver
Are we more than blind players in an evolutionary business game?

The new approach to economics has important implications for management, and in particular for strategy and organization. Although it is still in its infancy, we can begin to see how it might help us gain fresh insights into a host of difficult questions. Why do industries that look stable suddenly get turned upside down? How can companies develop strategies in the face of uncertainty? Why are big companies that seem to have it all so often vulnerable to attack by small upstarts?
Let's begin by considering where traditional thinking on management comes from, and how it is based on a central metaphor that originated in physics and was adopted by economics.

The roots of management thinking

Many of the most successful and widely used strategy tools today - the five forces framework, cost curves, the structure-conduct-performance (SCP) model, and the concept of sustainable competitive advantage, to name a few - owe their origins to ideas developed in the 1950s in a field known as the theory of industrial organization. IO theory, which is concerned with industry structure and firm performance, is in turn based on microeconomic theory.
Modern neoclassical microeconomics was founded in the 1870s by Leon Walras, William Stanley Jevons, and Carl Menger, and synthesized into a coherent theory by Alfred Marshall at the turn of the century. Seeking to make economics more scientific, Walras, Jevons, and Menger had borrowed ideas and mathematical apparatus from the leading science of their day, energy physics. Twenty years earlier, Julius Mayer, James Prescott Joule, Hermann von Helmholtz, and Ludwig August had achieved breakthroughs in energy physics that paved the way for thermodynamics. The early neoclassicists copied the mathematics of mid-nineteenth-century energy physics equation by equation, translating it metaphorically (and, according to many physicists, incorrectly) into economic concepts.
Another neoclassicist, Irving Fisher, showed in his 1892 doctoral thesis how the physicists' "particle" became the economists' "individual," "force" became "marginal utility," "kinetic energy" became "total expenditure," and so on. Although microeconomic theory has undergone many changes over the past century, the core ideas developed by Alfred Marshall, Irving Fisher, and the other early neoclassicists still resonate in economics textbooks today.(*)
Here can be found the roots of management's family tree, from Mayer and early thermodynamics through Marshall and microeconomics to Michael Porter and the five forces model of strategy. This intellectual lineage still affects the way we approach management today.



Early thinking on management

The new economics has advanced far enough for us to begin to make preliminary hypotheses about its implications for strategy and organization. One characteristic of complex adaptive systems is punctuated equilibrium. This natural endogenous feature of the evolutionary process occurs when times of relative calm and stability are interrupted by stormy restructuring periods, or "punctuation points." Punctuated equilibrium makes it difficult for participants to survive for long periods, as their strategies and skills tend to get finely optimized for the stable periods and then suddenly become obsolete when the inevitable restructuring takes place. Similarly, companies have a hard time surviving the upheavals, shakeouts, and technology shifts that punctuate the evolution of markets. To prosper in the long run, a company must adapt as readily as its market, or more so. More specifically, it must be both a strong competitor in the current regime and a smart evolver, able to innovate ahead of the market or to adapt with it.


The equilibrium view of strategy has focused on how to be a good competitor; let us consider five critical aspects of being a good evolver.



1. Focused versus robust strategies
Traditional strategy tends to emphasize a single focused line of attack—a clear statement of where, how, and when to compete. In a complex adaptive system, a focused strategy to dominate a niche is necessary for day-to-day survival but not sufficient in the long run. Given an uncertain environment, strategies must also be robust—that is, capable of performing well in a variety of possible future environments.5
2. Competitive advantage versus continuous adaptation
Evolutionary systems exhibit a phenomenon known as the Red Queen effect, after that character's remark in Through the Looking Glass: "It takes all the running you can do to keep in the same place."6 In nature, the Red Queen effect is at work when a predator learns to run faster; its prey responds by acquiring better camouflage; the predator then develops a better sense of smell; the prey starts to climb trees; and so on. Evidence suggests that the business world resembles a Red Queen race. A study of the performance of more than 400 companies over 30 years reveals that firms find it difficult to maintain higher performance levels than do their competitors for more than about five years at a time (Exhibit 3). Long-term superior performance is achieved not through sustainable competitive advantage but by continuously developing and adapting new sources of temporary advantage and thus being the fastest runner in the race.



3. Conservative operator versus radical innovator
In a complex adaptive system, an agent that is resistant to change and not adaptable will have low fitness, and so, conversely, will an agent that is oversensitive to shifts in its environment and constantly making radical responses. But between these extremes of stasis and chaos lies a region—the edge of chaos—where fitness is maximized (Exhibit 4). Being at the edge of chaos means something more subtle than pursuing a moderate level of change. At the edge of chaos, one is simultaneously conservative and radical.

Evolution is adept at keeping things that work while at the same time making bold experiments. The morphology of the spinal cord is a robust adaptation that has survived eons of evolution and enormous environmental shifts. Yet nature has experimented wildly around this core idea, producing vertebrates that range from birds to whales to humans.
The Walt Disney Company is a firm that prospers at the edge of chaos. Its theme parks and other businesses are run in a deeply conservative fashion. A strong culture supports Disney's mission of providing family entertainment. In operations, no detail is too small, right down to the personal grooming of the parking-lot attendants. This culture is ingrained in the organization and constantly reinforced through management processes.
At many organizations, such a conservative culture and such tightly controlled operations would snuff out creativity. Yet Disney manages to be one of the most innovative companies in the world. It pioneered animated films and destination theme parks, built EPCOT, linked media and retail with its Disney Stores, and took an early lead in cable television. Disney manages the tension between conservatism and innovation by maintaining an almost cultlike attention to detail and discipline but at the same time forgiving honest mistakes made in the pursuit of innovation.
4. Routinized versus diverse strategies
Another requirement for success in evolutionary systems is a rich pool of possible strategies. This diversity represents the source of the innovations that keep a player ahead in the Red Queen race and can be drawn on to develop responses when the environment changes. But diversity also has its cost. Many mutations are harmful and selected against, limiting the diversity found in a species. Moreover, a certain level of standardization is beneficial: a relatively narrow range of mating behavior, for example, probably makes it easier for interested parties to find one another. Evolution strikes a balance, standardizing designs that work but seeding the population with enough variation to provide a basis for future innovation and adaptation.
Few companies are skilled at striking this balance. The result is firms that are either chaotic or vulnerable at punctuation points because they no longer have a well-stocked pool of ideas and experiences from which to draw.
5. Scale versus flexibility
In traditional strategic and organizational thinking, big is good. Benefits of scale are easy to identify in purchasing, operations, marketing, and so on. Why is it, then, that big companies can have such a hard time responding to attacks by smaller competitors? A complexity-based view can shed light on the downside of size.
A simple system with relatively few parts and interconnections isn't highly adaptable: the number of states it can manifest is small compared with the number of situations it might encounter. As the system grows bigger and more complex, the number of states it can manifest, and thus its repertoire of possible responses to changes in its environment, grows exponentially. However, beyond a certain level of scale and complexity, its adaptiveness drops off rapidly in what Stuart Kauffman calls a complexity catastrophe. This occurs when the epistasis, or interaction between the parts, builds to such an extent that any positive change in one part has ripple effects that cause negative changes elsewhere. The system thus becomes more conservative as it grows, and finding adaptations that don't have harmful side effects gets harder and harder.
When Dell Computer began to do well at selling inexpensive personal computers by mail, no doubt someone at IBM said, "Why don't we do that too?" But IBM couldn't follow suit without damaging its extensive distribution channels of dealers and direct salespeople. Its history and size created a trade-off that Dell didn't face and made it difficult for IBM to respond.
Companies can mitigate the effect of complexity catastrophes through strategic and organizational changes. GM started Saturn in a greenfield organization precisely to free it from the constraints of corporate bureaucracy. AT&T split itself in three to create smaller organizations and reduce strategic conflict.


Becoming competitors and evolvers

As a complexity-based view of economics develops, new tools will be devised to help managers fashion better-evolving companies. Some of these tools will be analytical: options theory and evolutionary modeling to help develop robust strategies, for example. Others will be conceptual: new organizational forms that help avert complexity catastrophes, say, or practices that promote a rich fund of ideas.
Becoming a better evolver will be a major challenge for most companies; it is difficult enough just to be a successful competitor. And how do you motivate a thriving organization in a stable regime to take on the task of becoming more innovative and adaptive so as to meet challenges it can't even foresee? Equally, a company struggling through a major punctuation point finds it hard to worry about its long-term evolvability.
But for companies that do accept the challenge, the payoff promises to be considerable. Unlike creatures in nature, we are not blind, passive players in the evolutionary game. Through the sciences of complexity, we can come to understand how evolution works, the tricks it has up its sleeve, and the skills needed to survive in a complex world. If we do so, we may be able to harness one of the most powerful forces of all: evolution will then be the wave we ride to new levels of creativity and innovation rather than the tide that washes over us.