Strategy as Evolution with Design

In 1978, Ronald Coase wrote in a comment in the American Eco- nomic Review: “The IQ of Natural Selection is zero. The IQ of busi- nessmen and politicians may not be too high but it is not zero.” While Coase was referring to the debate about the role of natural section versus intentionality in the theory of the firm that had taken place for decades, his statement captures what we refer to as “evolution with design”: strategy processes are evolutionary by nature, but they involve significant elements of intentional design and orchestration of assets by managers.

Edith Penrose’s work is remarkably consistent with many of the core insights in the dynamic capabilities framework; and with Coase’s insight too. In her contributions to the debate about biolog- ical analogies, she expressed distaste for adaptations of biological reasoning without also recognizing the key differences between biological and firm evolution. As she put it:

The purpose of analogical reasoning in which we consciously and sys- tematically apply the explanation of one series of events to another very different series of events  is  to help  us  better  to understand the nature of the latter, which presumably is less well understood than the former. If the analogy has really helpful explanatory value, there must be some reason for believing that the two series of events have enough in common for the explanation of one, mutatis mutandis, to provide at least partial explanation for the other. (1952: 807)

Penrose worried that biological analogies abstracted from inten- tionality and that observed evolution was not blind evolution. Neglecting intentionality meant (according to Penrose) that the analogy between innovations and mutations breaks down since mutations in biology are not correlated with the environment. Mutation in biology is not explained.  Yet,  in  economics  one can relate innovative activity to profit-seeking behavior (Penrose, 1952: 815). As she noted:

But mutations are “alterations in the substance of the hereditary consti- tution” of an organism, while innovations, though they may consist of changes in the constitution of firms, more often than not are directly related to the environment of firms whereas the biologists tell us that genetic mutations are apparently completely unrelated either to the envir- onment or to the agent inducing the mutation. The biologist cannot explain why motivations take the course they do while the economist, if he can assume with some justification that the activity of firms is induced by a desire for profits, has a plausible partial explanation of innovation.

Several decades of research on organizational and strategic change and capabilities have brought a shifting focus to fundamental issues in strategy. Not only has economics, management, and strategy become enriched with ideas from other fields, but also concepts such as routines, competencies, capabilities, and learning rose from neglected subfields to attain near parity with old concepts of organization and management theory. Ideas on competences and capabilities have begun to emerge as viable complements not only of neoclassical economics, but also of much of transaction cost theory (Dosi, 2004). Most of this new discussion takes place within the analytical framework of evolutionary and behavioral theory, broadly speaking. In this chapter we have tried to emphasize some of the roots of branches of this research agenda, focusing in partic- ular on dynamic capabilities. It is an integrative and interdisciplin- ary framework designed to accommodate ideas from transaction cost theory as well as evolutionary theory in order to develop an empirically relevant theory of strategy that sees strategic processes as involving evolution with design.

Such a framework invites attention to entrepreneurship, organi- zational learning, and the role of the manager/leader of the firm. The dynamic capability view sees the firm as an incubator and repository for difficult to replicate technological and organizational assets. Distinctive processes support the creation, protection, and augmentation of firm-specific assets and competences; all vital elements in the strategic renewal process. These assets and com- petences reflect both individual skills and experiences as well as distinctive ways of doing things inside firms. To the extent that such assets and competences are difficult to imitate and are effectively deployed and redeployed in the marketplace (reflecting dynamic capabilities), they can provide the foundations for competitive advantage.

The dynamic capability perspective is still developing. It offers an integrative framework and perspective in which several theo- retical traditions are combined. Understanding and utilizing ideas from different traditions—transaction cost theory, evolutionary economics, and behavioral theory—provides a unique intellectual platform. Such an integrative approach is also consistent with March’s call for using both exploration and exploitation in orga- nizational processes. As he said:

[Organizations as well as theories] that engage in exploration to the exclu- sion of exploitation are likely to find that they suffer the costs of experi- mentation without gaining many of its benefits. They exhibit too many undeveloped new ideas and too little distinctive competence. Conversely [organizations and theories] that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in suboptimal stable equi- libria. As a result, maintaining an appropriate balance between exploration and exploitation is a primary factor in . . . survival and prosperity. (1991: 71)

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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