business evolution and the costs of change

1

Business Evolution and

the Costs of Change

1. Introduction

2. The Cult of Change

3. Lessons from Biological Evolution

4. Studies of Adaptation in Business Firms

5. Conclusion and Implications

Geoff Hodgson

www.geoffrey-hodgson.info

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1. Introduction

1. Most businesses need to adapt to some

extent, to update practices and cope with

changing business environments.

2. But complexity, possible mistakes and the

costs of change have also to be taken into

account.

3. And the mechanisms of change and its

limits have to be understood./ 34

Business Evolution and the Costs of Change

3

1. Introduction

4. Too much emphasis on individual

entrepreneurship and leadership ...

5. ... to the detriment of harbouring and

developing existing workplace skills,

including those embodied in teams.

6. Some general principles of biological

evolution help us to understand how

businesses evolve./ 34


4


Chief Executive of Royal

Mail, Adam Crozier,

explained in 2007: “We are

losing business because we

have failed to change and

modernise.”

/ 34


The 2009 postal strikes are estimated to have cost more

than £500 million to businesses in London alone.

Crozier received £3.5 million in pay and awards on

leaving Royal Mail

5


Willie Walsh (Chief Executive of

British Airways): the agreement

of staff to “permanent change” is

essential for the airline to recover:

“without change, BA will just

shrink and shrink and shrink”

/ 34


The 2010 British Airways strikes are

estimated to have cost BA itself £250 million.

Walsh‟s 2009 annual salary was £743,000.

6


/ 34


7


By 2007 the Labour Government's reforms and reorganisations

of the NHS had cost £3 billion to implement – and brought its

structure back to roughly where it was in 1996. / 34


8


In 2006 David Cameron promised “no more

pointless and disruptive reorganisations” of

the NHS.

But the new 2010 coalition government

proposes the most radical reorganisation of

the NHS in England since 1948 ...

... which is likely to cost between £2bn and

£3bn to implement, with no guarantee that it

will improve performance (Walshe 2010). / 34


9


Kieran Walshe, British Medical Journal (2010)

says there is very little evidence that past NHS

reorganisations have produced any improvement,

and argues that the new government “looks likely

to make all these mistakes again.”

Walshe (2010): Minister of Health Andrew

Lansley “seems to have learned little from the

past history of NHS reorganisation”

/ 34


10


A 2009 National Audit Office

study of more than 90 government

reorganisations found that, despite

huge costs, the benefits were

unclear, the process was often

poorly managed, and that the impact

on performance was often adverse.

/ 34


11


“organisational „change‟ has become

embedded in our assumptions of what a

„good‟ organisation is. We seem to have

stopped questioning the trade-offs

associated with change to the extent that

change has become a fundamental and

often over-riding organisational ... value,

in and for itself.”

Darl G. Kolb (2002)./ 34


12


Change under the Romans:

“We trained hard ... but it seemed that

every time we were beginning to form

up into teams we would be reorganized.

I was to learn later in life that we tend to

meet any new situation by reorganizing;

and a wonderful method it can be for

creating the illusion of progress while

producing confusion, inefficiency, and

demoralization.”

Gaius Petronius, 27-66 AD. / 34


13

Within biological evolution, change occurs

principally in two connected ways:

1. Development of individual organisms

guided by their (invariant) genetic

code, triggered by other factors and

moulded by their environment.

2. Population-level selection of entities

fitter in relation to a particular

environment, involving expiring and

(slightly variant) newborn entities./ 34



Charles Darwin

14

Equivalent modes of change in business:

1. Development of individual firms – adaptation

by the firm to its environment, or creation of

new products and markets.

2. Selection means elimination of some firms

and the birth of others. This is a matter for

government competition policy. But selection

may be even less effective in business than in

nature in favouring “fitter” firms./ 34



15

Michael T. Hannan and John Freeman in

Organizational Ecology (1989) – emphasise

population-level selection over individual firm

adaptation.

Research in the Group for Research in Organisational

Evolution (GROE) in UH into adaptive capacity.

The crucial question is not whether adaptation occurs

– it always does to some degree – but the degree to

which the organisational “genes” change. There can

be fixed “genes” for adaptability. / 34



16

What are the organizational “genes” ?

The “meme” delusion.

Memes = ideas etc. (Dawkins, Blackmore et al.).

Problem of reconciling ideal with material.

Where do they reside? How is their information stored?

Unless we have some notion of how the information is

stored and replicated the meme concept is useless.

It provides a delusion of scientific advance./ 34



17


Problem of reconciling ideal with material.

The philosophy and psychology of

pragmatism.

William James, C. S. Peirce,

John Dewey et al.

Habit as the basis of belief.

Thorstein Veblen

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18


Includes critique of memes

and an alternative

A “genetics” of

socio-economic evolution

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Business routines as “genes” – Richard Nelson and

Sidney Winter (1982) An Evolutionary Theory of

Economic Change.

Habits as the basic social replicators, with business

routines as organisational replicators – Geoffrey M.

Hodgson and Thorbjørn Knudsen (2010) Darwin’s

Conjecture.

An organisation’s knowledge and skills are stored

in its habits and routines. / 34



20

Unlike natural organisms, business

organisations can change their habits and

routines (“genes”).

Misleading to regard this as the

“Lamarckian” inheritance of acquired

characters.

In any case, such change is often difficult

to accomplish effectively. / 34



21

Lamarckism in biology?

Contrary to organisms on Earth, assume that

the genetic inheritance of acquired

characteristics were possible.

BIG PROBLEM: the substantial encoded

reaction to every ephemeral change, and the

relative devaluation of tried-and-tested

solutions to enduring adaptive problems.

/ 34



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Q. What are the preconditions for the evolution of

greater complexity in (biological or business)

systems with replicating entities?

A. Minimisation of copy error (regarding information

in the replicator) is more important than the

minimisation of read or development error.

Sources: Hodgson and Knudsen (2010) in Journal of

Economic Behaviour and Organization and (2010)

Darwin’s Conjecture (Chicago University Press)./ 34



23

Social and business complexity has increased

much more rapidly than overall biological

complexity.

Consequently there are theoretical arguments

why established business routines change slowly.

Some changes can be designed – an advantage

over biological evolution.

But complexity and uncertainty put boundaries

on effective design. / 34



24

Sir Alan Sugar: “I can tell you

where every screw, nut and bolt is

in my company. I know

everything [in my business].

Never, ever, underestimate me.”

But knowledge encapsulated in

the “genes” – habits and routines

– of any firm is typically

complex, difficult to access and

hard to codify./ 34



25

Selection forces are relatively strong.

Studies show that about 8%-12% of

firms become extinct each year

(Dunne et al. 1988, Geroski 1995, Klepper and

Graddy 1990, UK Government Statistics.)

/ 34



26

Individual adaptation is difficult and slow.

Dunne et al. (1988, 1989) reported that it

took entrants more than 10 years to increase

their output level to match the industry

average.

“Small plants fail more often than large

plants, and young plants fail more often

than old plants.”/ 34



27

Individual adaptation is difficult and slow.

Data collected by Stephen Herman (from

GROE in UH) in 2008 suggest that

adaptability in most firms declines slowly

through time, but is crucial for survival.

/ 34



28

Many firms try to “copy exactly”:

Intel; McDonalds, Burger King, Pizza Hut,

Kentucky Fried Chicken; Holiday Inn, Novotel,

Hilton (various brands). Marriott (various brands);

Bank of America, Wachovia, HSBC; Merrill Lynch,

Starbucks, Cosi; Office Depot, Staples; Borders,

Barnes and Noble; Ikea, The Bombay Company;

Benetton, Gap (Knudsen and Winter, unpublished).

= minimisation of copy error/ 34



29

Christian Stadler (Harvard Business

Review 2007) deduced four principles of

business success from a comparative study

of different companies:

Principle 4: “Be conservative about

change. Great companies very seldom

make radical changes – and take great care

in their planning and implementation.”

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30

In his book Good to Great, Jim Collins

(formerly Stanford Business School)

identified 11 US companies that, after 15

years of underperformance, had produced

shareholder returns at least three times the

market average over the next 15 years.

Of the 11 chief executives responsible, 10

came from inside the company.

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31

1. Information stored in the habits and routines of

firm employees is underestimated by

comparison to the prevalent stress on (often very

highly-paid) “entrepreneurs” and “leaders”.

2. Generally, planned change in firms should be

piecemeal, experimental and cautious.

3. Generally, firms should concentrate primarily on

the careful development of existing

competences rather than radical reorganisation./ 34

5. Conclusions and Implications


32

4. Change always has costs but only sometimes has

benefits.

5. Firms should first understand and develop what

they already do relatively well.

6. Leadership and entrepreneurship are important,

but leaders and entrepreneurs have to learn much

from other employees.

7. Much change will result from factors beyond an

individual firm’s control – by new entrants or

bankruptcies. / 34



33

Mary D. Poole

“Leadership should be more participative than

directive, more enabling than performing.”

John Maxwell

“The first step to leadership is servanthood.”

Darl G. Kolb

“Managing continuity is about connecting the past

to the future and consciously nurturing elements of

stability within a changing environment.”/ 34



34

“Managerial

conservatism”(but note the small “c”)

/ 34



business evolution and the costs of change

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