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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
/ 34
2
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
Business Evolution and the Costs of Change
4
2. The Cult of Change
Chief Executive of Royal
Mail, Adam Crozier,
explained in 2007: “We are
losing business because we
have failed to change and
modernise.”
/ 34
Business Evolution and the Costs of Change
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
2. The Cult of Change
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
Business Evolution and the Costs of Change
The 2010 British Airways strikes are
estimated to have cost BA itself £250 million.
Walsh‟s 2009 annual salary was £743,000.
6
2. The Cult of Change
/ 34
Business Evolution and the Costs of Change
7
2. The Cult of Change
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
Business Evolution and the Costs of Change
8
2. The Cult of Change
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
Business Evolution and the Costs of Change
9
2. The Cult of Change
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
Business Evolution and the Costs of Change
10
2. The Cult of Change
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
Business Evolution and the Costs of Change
11
2. The Cult of Change
“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
Business Evolution and the Costs of Change
12
2. The Cult of Change
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
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
17
What are the organizational “genes” ?
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
/ 34
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
18
What are the organizational “genes” ?
Includes critique of memes
and an alternative
A “genetics” of
socio-economic evolution
/ 34
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
19
What are the organizational “genes” ?
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
22
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
3. Lessons from Biological Evolution
Business Evolution and the Costs of Change
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
4. Studies of Adaptation in Business Firms
Business Evolution and the Costs of Change
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
4. Studies of Adaptation in Business Firms
Business Evolution and the Costs of Change
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
4. Studies of Adaptation in Business Firms
Business Evolution and the Costs of Change
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
4. Studies of Adaptation in Business Firms
Business Evolution and the Costs of Change
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.”
/ 34
Business Evolution and the Costs of Change
4. Studies of Adaptation in Business Firms
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.
/ 34
Business Evolution and the Costs of Change
4. Studies of Adaptation in Business Firms
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
Business Evolution and the Costs of Change
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
5. Conclusions and Implications
Business Evolution and the Costs of Change
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
5. Conclusions and Implications
Business Evolution and the Costs of Change
34
“Managerial
conservatism”(but note the small “c”)
/ 34
5. Conclusions and Implications
Business Evolution and the Costs of Change