Academic journal article The McKinsey Quarterly

Managing Metamorphosis

Academic journal article The McKinsey Quarterly

Managing Metamorphosis

Article excerpt

Must all companies eventually vanish?

Ideas borrowed from evolutionary theory can help companies survive and thrive

Ecclesiastes 9:11 speaks of a puzzle that baffles the business world to this day. Why is it that companies that seem to have every advantage are overtaken by apparently weaker competitors?

Seeking a paradigm that might help explain this puzzle, some management theorists have turned to evolutionary theory.(*) Charles Darwin proposed that random mutations in the gene pool of a species are the force that drives evolution. As conditions in the environment change, a series of apparently inconsequential mutations can make the difference between adapting and flourishing on the one hand, and declining or becoming extinct on the other. So too in the business arena: as market conditions change or technology advances, a series of small changes in the culture or organization of one company will keep it healthy while another, more rigid, slowly fossilizes.

An alternative vision of evolution was put forward by Darwin's contemporary Jean Baptiste Lamarck. Lamarck believed that capabilities acquired by one generation of a species could be transmitted in its genetic code to subsequent generations. Ultimately unpersuasive as science, Lamarck's view nevertheless provides a fruitful metaphor for the way in which one generation of managers can build up assets and capabilities that are then passed on to the next generation.

And if the idea of evolution as gradual adaptation offers a useful analogy, the fate of the dinosaurs, seemingly wiped out by an asteroid, reminds us that incremental shifts are only part of the story. A business, like a species, might evolve successfully through the gradual transformation of its environment only to be knocked flat by the sudden impact of new technologies, deregulation, and the like.

But if thinking of companies as evolving species provides a basis for understanding why they can dominate their industry and then lose out to an apparently weaker rival, there are limits to the value of the analogy. An evolving species has no ability to predict the future; it can only react to events. Business managers, on the other hand, have a degree of control over their environment and can develop insight into how it is evolving. Though evolutionary theory may provide clues as to why individual businesses thrive or fail, it is just a beginning.

We believe managers should complement an evolutionary understanding of their business environment with insights from a related way of seeing things - the resource-based view of companies - and from business dynamics to build a "dynamic resource system view" of their business.

In the resource-based view, companies are seen as collections of resources a parallel to the evolutionary vision in which valuable resources take the place of useful genes.(*) The dynamic resource system view (see panel) is an approach that makes explicit the connections between resources and why resources build up or deplete over time. Business dynamics is a rigorous analytic tool that is ideal for making these ideas operationally practical.(**)

Most managers know instinctively that a company's "gene pool" is not static. In fact, the resources that make up the gene pool are constantly evolving. In many cases, they feed off one another and grow stronger through a virtuous self-reinforcing process. Managers often describe the outcome as a sustainable advantage.

Companies find themselves overtaken when rivals trump their source of sustainable advantage. This seldom happens suddenly; usually, the rivals develop new assets over time through a virtuous self-reinforcing process. Some companies manage to avoid being overtaken, remaining dominant for a very long time. In an evolving business environment, such a company must be adaptable; indeed, its resource system may change out of all recognition from one competitive era to the next. …

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