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In one of his famous quotes on natural selection, Charles Darwin once said: “In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment.” Interestingly, this statement holds equally true for biology as for business; companies that fail to change and adapt to a changing environment will eventually be forced to exit the market due technology shifts. History is replete with such examples, for instance when horse carriages were replaced by automobiles, fixed-line phones by mobiles, typewriters by PCs, and so forth. Put simply, in a business setting, innovation is the process through which firms evolve, hopefully for the better.

Insi

ghts

Innovation and Evolution

- Dr. Martin Lockstrom

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The Corporate DNAIn living organisms, genes in the form of DNA form the “source code” which dictates how cells should divide and develop; starting as stem cells, some develop to become muscle cells whereas others develop into brain cells, and so on. What science shows is that DNA also constantly changes over time, in a process called mutation. Some of these changes go unnoticed, whereas others make a noticeable adverse or beneficial impact on the organism. Those belonging to the last category help the organism improve its chances of survival and thereby pass on this beneficial trait to future generations.

In a business setting, the corporate DNA is nothing but the corporate culture of values, beliefs and subjective norms permeating the organization. Instead of genes, there are memes (a generic information fragment), a term introduced by well-known British evolutionary biologist Richard Dawkins. Memes are not designed, but can only be observed and classified retrospectively through the mere process of long-term survival – memes simply survive because they contribute to the effectiveness of the organization.

Corporate culture is the source of intention (such as strategy), which in turn dictates business decisions. This fundamental principle is known as the theory of reasoned action, developed in academic circles in the 1970s. As we all know, although DNA mutations happen sporadically and spontaneously all the time, the process is rather slow and very few turn out to be beneficent to the organism. This is also the reason why it’s incredibly hard to alter corporate culture – to make a comparison, it even dwarfs a global SAP roll-out! Add the intangible nature of corporate culture as another complicating factor, and it’s easy to understand why many firms don’t even bother trying to change it, leading to stagnation and decline as a best-case result.

Why Companies ExistLike living organisms, companies exist because it helps them accomplish things that they would not have been able to accomplish otherwise. So if culture is the corporate DNA, what is the very purpose of doing business at all? From an evolutionary, biological perspective, the answer would probably be “survival” or “in order for genes (or in a business context, memes) to replicate”. Interestingly, the two are not mutually exclusive, but actually go hand in hand; the basic survival mechanism of a species is replication. In other words, species try to survive not by placing a single bet on the survival of an individual organism, but by hedging their bets on a large number of differently configured organisms.

Whereas species try to survive through replication and constant adaptation of constituent organisms, the ultimate goal (explicit or implicit) of any firm is to maximize profit, regardless of other goals such as shareholder value, sustainability etc., which at the end of the day are all subordinate. The notion of profit maximization according to classical economics omits one of the core tenets of evolution, namely reproduction. If reproduction is one of the fundamental processes of evolution, why is it so uncommon in a business context? Have managers missed something?

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Resolving the Innovator’s DilemmaHarvard professor Clayton Christensen founded the term “innovator’s dilemma” to denote the phenomenon where companies do everything right but still fail. Why? Because as companies grow larger and become more and more successful, managers tend to stick to practices that made them successful in the past, without considering whether they might continue to do so in the future.

On a day-to-day basis, companies are facing even more dilemmas, most importantly the struggle between creativity and efficiency: On the one hand, companies have to ensure quality and low cost through standardization and stable business processes. On the other hand, companies also have to ensure future revenue streams, which can only come into existence through innovation and creative thought processes. Alas, the two do not always go well together (see Table 1).

Table 1. Corporate dilemmas

Build on past vs. Learn from past & realign

Deliberate strategy vs. Emerging strategy

Hands-on leadership vs. Direction only leadership

Build on strengths vs. Search out new opportunities

Differentiate for high value added vs. Beat competition on costs

Diversify vs. Focus

Size for critical mass vs. Small & entrepreneurial

Profit for shareholders vs. Consensus outcome for many stakeholders

Mass market vs. Niche market

Global vs. Local

Culture of stability vs. Culture of chaos through innovation

Centralised for control vs. Decentralised for flexibility

Relying on logic & following vs. Being creative & pioneering

Revolutionary change vs. Incremental change

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Furthermore, disruptive technologies, which may seem irrelevant and non-threatening in the early stages are often neglected as they cater to new market segments that cannot be analyzed easily. In many cases, the root cause of this organizational rigidity is corporate culture.

Most innovation experts agree that in order to succeed with anything beyond incremental innovation, a new unit within the existing organization has to be set up and eventually spun off. The idea is to create a unit (Type B organization) which can operate more independently and avoid the constraints that often hinder innovation from taking place in traditional organizations (Type A organization) (see Figure 1). In other words, the Type A organization serves as an incubator for Type B organizations, that are later spun off as separate entities. Over time, these spin-offs will themselves eventually turn into Type A organizations as they mature.

Figure 1. The Type A organization as incubator for innovation

The reasons for this are manifold. Firstly, in order to nurture innovation and creativity in general, there must be a high tolerance for ambiguity and an acceptance of the fact that the organization would have to operate without clear rules; many innovations are generated randomly, so without random activities, there can be no innovation. Secondly, the traditional approach to investment is to set specific objectives and develop a single path – in order to enable innovation, processes have to be iterativeand multiple alternative innovation paths must be pursued. Finally, and most importantly, those who are driving innovation must be allowed to fail (preferably fast), and take risks. Table 2 shows a comparison of traditional vs. innovative organizational characteristics.

Table 2. Traditional versus innovative organizations

Type A (Traditional) Organization Type B (Innovative) Organization

Operates within mental framework based on clear and accepted set of rules of the game

No clear rules – these emerge over time

High tolerance for ambiguity

Strategies path dependent Path independent, emergent, probe and learn

Clear selection environment Fuzzy, emergent selection environment

Selection and resource allocation linked to clear trajectories and criteria for fit

Risk taking, multiple parallel bets, tolerance of (fast) failure

Operating routines refined and stable

Operating patterns emergent and ‘fuzzy’

Strong ties and knowledge flows along clear channels

Weak ties and peripheral vision important

Degree of instability

Deg

ree

of u

ncer

tain

ity

Type A

Type B

Traditional Organization

Innovative Organization

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Making it all HappenGoing back to our earlier context of evolutionary biology, the approach makes perfect sense, as it helps companies to “reproduce” through new entities which can grow and adapt to a changing environment. What’s more, the clear legal boundaries between the parent and the spun-off entity also allow the latter to operate more freely, while reducing legal and financial risk to the former. If the spin-off fails, the effects will not propagate. Finally, the parent company can provide managerial capacity, industry and government relationships, and assistance with administrative activities, which frees up the capacity of the subsidiary’s management to concentrate on products and markets. An overview of some notable examples is shown in Table 3. The reasons for these spin-offs vary, but the least common denominator is to obtain more strategic leeway for exploiting innovation and to provide more transparency to investors and shareholders.

Table 3. Spin-off examples

Parent Organization Spin-off Year

Eli Lilly Guidant 1994

Hewlett-Packard Agilent Technology 1999

Encana Corporation Cenvous Energy 2009

Dryships Inc. Ocean Rig UDW 2011

Oxford University Oxford Nanolabs 2005

IBM Shugart Associates 1973

Shockley Transistor Fairchild Semiconductor

1957

Time Warner AOL 2009

Dreamworks Studios

Dreamworks Animation

2004

In a business context, spin-offs happen relatively seldom. Why is this the case? The reason is three-fold. Firstly, incentives of senior managers are often misaligned with the enablers of innovation. Executives are usually rewarded by considering KPIs like revenue, revenue growth, profitability and return on assets. Therefore, any undertaking that may jeopardize these metrics is usually not actively promoted. Secondly, as the average CEO tenure is 8.4 years, according to data from The Conference Board, executives will unlikely support investments with a longer pay-back period and let someone else harvest the fruits. Finally, for personal reasons, decision makers have a tendency to avoid giving up management control which might occur in the case of spin-offs.

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Summary and ConclusionBusinesses bear much resemblance to living organisms from an evolutionary, biological perspective. Alas, all too often, innovation in companies is hampered by misaligned incentive systems or inadequate organizational design, which don’t encourage creative thinking. As we have seen from the discussion, evolutionary biological can provide us with many valuable insights and analogies that can help us better understand the meaning of concepts such as corporate DNA, and ways to promote longevity despite the pressure to think short-term. By taking a broader view of innovation and realizing that the key enabler at the end of the day is corporate culture, we also realize that any process, system or employee is only as good as the corporate culture allows. Changing and improving corporate culture is one of the hardest undertakings one can pursue.

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About the Author

Dr. Martin Lockstrom Principal Consultant, Building Tomorrow’s Enterprise, Infosys Labs

Martin is a specialist in Supply Chain and Operations Strategy, Outsourcing/Offshoring and International Management. During a six-year stint in China, he established the research and education activities at the SCM, Sustainability and Automotive academic centers at China Europe International Business School, Shanghai.

He established the first endowed chair for Purchasing and SCM in China at Tongji University, Shanghai, and was also responsible for setting up Supply Chain Management Institute China, an international network of SCM research and education hubs.

Martin co-founded Procuris Solutions, an IT company specializing in SCM-related solutions, offering consulting services to companies like Accenture, Ariba, BMW, Clariant, Dell, Dow, Ernst & Young and Intel, among others.

He has a Ph.D. in Supply Chain Management from European Business School, Germany, a bachelor’s and master’s degree in Industrial Engineering and Management, from Chalmers University of Technology, Sweden. He speaks Swedish, English, German and Chinese, has published over 50 articles and papers and presented at more than 60 conferences.

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