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Faculty Insights

Survival of the Fittest for Firms is About Flexibility in the Face of Change

By Wisconsin School of Business

September 18, 2017

In 1979, Kodak developed the world’s first electronic camera. The company predicted digital would sweep the industry by the 1990s, so to get ahead of the trend, it invested everything in preparing for a non-film future. By the time digital models dominated the market in the 2000s, Kodak was on the road to bankruptcy.
Short of possessing a crystal ball, it’s pretty hard to predict the future regardless of whether you’re an individual or an organization. From Sears to Blackberry to Blockbuster, time and time again we see firms failing in response to technological change. Why do these successful and powerful firms—experienced in the market with big resource and brand advantages—ultimately fail in response to the advent of new technology?
In the business world and in academic literature, different arguments are used to explain this phenomenon. Companies fail, the theories go, because of a lack of assets and capabilities, for example, or because their existing customer base and market hold them back. However, in my research with Vikas Aggarwal, of INSEAD, and Maciej Workiewicz, of ESSEC Business School, we took a different approach. We looked at the organization itself and its ability and willingness to adapt, which we believe says as much about a firm as things like the scale of its production, strong branding, or a vast network of contacts and resources. We call this a firm’s “adaptive capacity.”

Hart Posen
Management and Human Resources Associate Professor Hart Posen

Our team created a computational model that examined organizations adapting to technological change. By simulating the lifespan of millions of organizations, a single instance of technological change can be magnified many times over to probe the full range of an organization’s ability to adapt. Using this process, we were able to conceptualize three different types of change that these simulated organizations experienced: incremental change (low change difficulty, small reward to changing), discontinuous change (high change difficulty, big reward to changing), and entrapping change (high change difficulty, big long–term reward to changing that is masked by substantial short–term costs of changing).
The results of our study suggested that the organizations that survive and prosper, adapting to the shock most successfully, had a degree of adaptability, even when faced with entrapping change. An organization’s adaptability was enhanced if it could prepare—what we call in the study “formative exploration”—for change in advance. Formative exploration involves individuals and departments experimenting with new ways of doing things, well before technological change is on the horizon.
The less an organization was locked into a particular way of doing things, the more it might be able to absorb and survive even the most disruptive type of change.
In the real world, adaptability in an organization is inextricably tied to how employees and departments work together. In a hierarchical system, work is interdependent: one person’s job is dependent upon someone else’s job, and one department’s task is dependent on other departments’ tasks. Exploring alternative ways of doing things is challenging, because every time you try to do something different, you disrupt the other person and that other person disrupts someone else. In such a setting, early kinds of behavior—ways of doing tasks and patterns that work—get locked in and reinforced. Change is always hard, but once there’s interdependence, it’s even harder. The role of formative exploration is not to discover new ways of doing things (although this may be a valuable side effect). Rather, when an individual explores and experiments with new ways of doing things, just a little, it forces others with whom she is interdependent to react, keeping the organization nimble, not too locked in to any one way of doing things. This is an important driver of an organization’s adaptive capacity.
Closing the stable door after the horse has bolted
Because change is so challenging, firms often take strong action once it’s too late, firing CEOs and management teams to catch up with the change that’s already happened, forcing change down through the organization. While complementary assets can buy companies some time—Toyota’s ability to build three million vehicles a year compared to Tesla’s 50,000 output, for example—it’s the decisions made at the organizational level that can have lasting effects on a firm’s survival. Case in point: During the 1990s, Borders and Barnes & Noble were on similar footing in terms of assets. With online shopping on the horizon, Borders decided not to innovate. Customers were still coming into stores, reading, buying coffee; all looked like business as usual. What they didn’t see were all of the consumers beyond their current customers; they were “entrapped” in the technological change and ultimately the retailer failed.
Strategically preparing for technological change
There is always an inherent tradeoff, then, between efficiency in the way we do things today and the ability to be dislodged from that version in order to transition to a new world.
Our research takes a forward-thinking approach that instead of getting fossilized in a particular way of doing things, firms can use formative exploration—strategic preparation—as a sort of knob that managers can tune to affect how a team prepares for change. Tune it too high, like Kodak did, and you will pay a price. Tune it too low, like Borders, and you may be out of business. Tune it just right, and your organization will have the capacity to adapt to change.
As an entrepreneur for ten years, I relate to that business drive to find the one right way of doing things. The problem is there is no one right way. Survival hinges on a bundle of ever-changing factors and the organizational factor never seems to be given much weight. Yet, it’s the organizational makeup that gives a company the capabilities to achieve, move forward, and innovate. We ignore that aspect, for the most part. Yes, the world might not change in a particular area of industry for 10 years; there is always a degree of risk in that tradeoff between the benefits of stability and the benefits to building flexibility into those processes.
Understanding how organizations can become more adaptable to change may not be simple, but the best time to start learning about them is not after the fact. We can take actions today to change the extent to which firms and their employees are locked into unhelpful and ultimately self-defeating behaviors when it comes to technological change.
Read the paper “Adaptive Capacity to Technological Change: A Microfoundational Approach” published by Strategic Management Journal.
Hart Posen is an associate professor in the Department of Management and Human Resources at the Wisconsin School of Business.