Too Successful to Succeed - University of Floridabear.warrington.ufl.edu/centers/purc/DOCS/... · Beliefs and Rules • North (1990, 2005): Institutions are sets of rules that reflect

“Leadership in Infrastructure Policy” www.purc.ufl.edu1

Too Successful to Succeed: Toward an Adaptive Model of

Firm Survival

Mark A. Jamison

Problem• Why do leading firms sometimes fail when

circumstances change?• Aside from concluding they…

Were never really that goodHad management problemsHad bad luck


Example• Xerox developed xerography, was viewed as a

well managed firm and led large copier production

• But it failed to be prominent in desktop copiers


Sears• Fortune (1964): Sears is “an extraordinary

powerhouse of a company” in retailing• Forbes (1990): “Sears has been a

disappointment for investors…”

• What happened?Rise of discount retailing and home centers in the 1960s, when Sears was at its peak


Computers• Mainframes

IBM leader• Minicomputers

DEC, Data General, Prime, Wang, Hewlett-Packard, and Nixdorf leaders

• PCsApple, Tandy, IBM (Boca Raton) initial leaders


DEC• Business Week (1986): “Taking on

DEC…is like standing in front of a moving train.” Cited in In Search of Excellence

• Business Week (1994): “DEC is a company in need of triage.”

• What happened? PC• DEC CEO flies plane rather than meet with IBM


Not just businesses• Labor unions failed to adapt to decline of

manufacturing• Civil rights organizations failed to adapt to

change in culture


Illustration• Suppose a duopoly providing x

Leading firm (expert) has lower marginal cost than rival (generalist)

• There are also potential entrants

• Technical change ⇒ demise of x and introduction of y

• Will incumbents survive the change? Who will be the expert firm for y?


What we find• Generalists have advantage if change is a

“leap”Expert firms won’t survive if there are generalists to replace them, even if expert firms foresee the change

• Expert firms have advantage if change is incremental

• Intense rivalry decreases likelihood of incumbent failure


Overview• Draw upon neuroscience, neuropsychology,

and behavioral economics• Examine human behavior in a novel

experience, i.e., one that it’s current beliefs do not adequately explain …

Indicates existing beliefs do not match realityIndicates existing institutional practices are not appropriate for the futureCreates ambiguity and distress


Overview (cont.)• Choices when novel experience

• Ignore: illegitimate or temporary. o U.S. auto manufacturers in the early 1970so IBM turned down Microsoft’s offer to sell DOS

• Recognize it for what it is and either…o Learn the new reality and adapto Leave the future to others


Novel experience• Something that happens that we cannot

explain given our beliefsTomorrow everyone receives a memo saying that all economics faculty get 40 percent raisesResponses

• “Bunch of bull.” “Hoax.” (Dismiss)• “Maybe the administration is really a bunch of nice

people after all? Or maybe it is up to something? Let’s see if it is true.” (Check beliefs)

o “Now that we know, they are nice (conversely, up to something), we will now act _______.” (Modify rules)


Institutional Change• Beliefs and rules• Theory of adaptive learning• Model of adaptive learning


Beliefs and Rules• North (1990, 2005): Institutions are sets of

rules that reflectBeliefs

• the way we think the world does work• the way we think the world should work• what we believe about others’ beliefs

Rules/Norms – the way we agree to do things• Reality – what really is


Notation• i’s beliefs at time t: Βi,t

• Reality at time t: Ρi,t

• Distance between beliefs and reality: ||Β i,t - Ρi,t ||Adaptive learning is decreasing the distance between beliefs and reality and changing the rules accordingly


16

NeuroscienceNeuroscience

Controlled Automatic

Linear and analytical. Subjective effort

Pattern based and quick response

Cognitive Recognize what is

Process novel information

Technical expert

Affective Emotions and Motivation

Consider emotional response

Accepted values and threats

Experts• Experts are those whose experiences map

well to their beliefsDoesn’t mean that they know reality, just that their experiences are the experiences they expect, given their beliefs

• ExamplesChessSecurities tradersSports


18







Technical expert




Exposure to novel patternscreates ambiguity

Exposure to novel patternscreates ambiguity

19







Technical expert




Adaptive learning usescontrolled processes to change automatic processes.

Adaptive learning usescontrolled processes to change automatic processes.

Changing requirescognitive effort

Changing requirescognitive effort

Changing requiresreworking of emotions,values, traditions

Changing requiresreworking of emotions,values, traditions

Confronting an adaptive challenge

• What happens when we cannot map an experience to our beliefs; i.e., encounter a novel experience?

Creates• ambiguity – a sense of not knowing how things really

work• anger – a sense that someone is screwing with us

The “stress” of ambiguity drains mental energy, which lowers productivity

20

Adaptive learning• Investigating the novel experience to learn new

realities (changing beliefs) and to adapt rules and strategies

• EffectsLowers ambiguity, which improves productivityRequires conscious effort and consumes mental resourcesInspiration: Potential to increase “profits” by improving beliefs

• Reversion risk if do not abandon former practices

21

Stress and mental work


Stress

StressIncreasingCognitive Activity

StressDecreasingCognitive Activity

“Flooding”

Model of Adaptive Learning• Recall distance between beliefs and

reality: ||Β

i,t - Ρi,t ||• Adaptive learning

f(Β i,t , Ψi,t ) = f(Β i,t+1)such that ||Β i,t - Ρi,t || > ||Β i,t+1 - Ρi,t ||Where Ψi,t = {0, Ψi,t , Ψi,t}

• No learning, productive learning, flooding


Model• Firms providing x

“Mix” of experts and generalists• There are also potential entrants

• Technical change ⇒ demise of x and introduction of y

• Demandx and y are substitutes, but y is more valuable


Model (cont.)• Supply

Constant marginal cost• Higher for generalist• Higher during adaptive work

Technology change• “Leap” if requires more adaptive work from expert

in x than from generalist in x to become expert in y• Otherwise, “incremental”


Model (cont.)• Adaptive learning

Recall that rate of adaptive work is limited• Too much leads to flooding

Leap changes result in• Expert needing more adaptive learning than

generalist• Expert needing more time than generalist if

flooding would occur


Model (cont.)• Rivalry

Conjectural variation• Firms choose outputs• Rivals’ reactions vary from none (Cournot) to one-

for-one (Bertrand)Finding

• With intense rivalry, only expert firms can receive non-negative profits in either market


Results• P1: With leap change and multi-period

adaptive learning for experts, expert firms choose to go out of business

Generalists can adapt faster and so become new expertsGeneralists can stay generalists at no cost


Results (cont.)• With sufficiently intense rivalry in x, all

firms are expertsWhen P1 holds, all incumbents go out of business

• With sufficiently intense rivalry in y, only firms becoming expert in y will survive

Works against experts in x


What’s next• Fully model customer transition• Incorporate internal processes for change

How someone ensures firm doesn’t dismiss novel experienceHow resisters can keep a firm from adapting

30

Documents

Too Successful to Succeed - University of Floridabear.warrington.ufl.edu/centers/purc/DOCS/... · Beliefs and Rules • North (1990, 2005): Institutions are sets of rules that reflect