1. Organizations as Evolutionary Systems Daniel Levinthal Wharton School, University of Pennsylvania

3. Sustained Competitive Advantage S&P 500 in 1957 74 firms 1997 Only 12 outperformed S&P 500 Owning just survivors would have yielded a 20% lower return than owning the S&P Foster and Kaplan (2001)

4. Challenge for Strategic Management What is the problem? What are our expectations? – Immortality – Sustained competitive advantage time Competitive advantage Competitive advantage time

5. “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 5 th Discipline) OODA loop (observe, orient, decide, and act) John Boyd (USAF Strategist)

6. 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

7. Nested Levels of Selection Environment Niches Selection criteria Selection pressure Org A Org B

8. Nested Levels of Selection Environment Niches Selection criteria Selection pressure Org A Org B a 1 a 2 a 3 a 4 a 5 Selection of projects and routines within the organization

9. Three Challenges to the Problem of Organizational Evolution Problem of interim selection Problem of selection criteria – Diversity From “Dynamic Capabilities” to Dynamic Organizations

10. QGTs Selection Environment Problem of Interim Selection: Evolutionary Dynamics

11. Genotype versus Phenotype Fixed genetic structure need not imply fixed form –Adaptation at the individual level –Developmental expression of genotype

12. 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)

13. QGTs Selection Environment Products Product markets Market share Patents & new products Financial markets Explicitly myopic Forward-looking but conditional on current outcomes

14. Time Performance Selection 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 Unfolding of alternative search strategies

15. 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

16. 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 inter- temporal dependencies

17. 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 State-setting Investment Realization of Uncertainty Stage 2 Investment

18. 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

19. 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)

20. 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 ?

21. 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)

22. 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

23. Small Steps on a Long Journey