Evolution and natural selection in the corporate world

At the risk of sounding as if I’m obsessed, I’m taking issue with another of Chris Dillow’s posts.

Johann Hari describes the theory (fact) of evolution through natural selection as “the greatest insight of any human being so far.“ This sort of claim has always struck me – and I suspect most economists – as a gross exaggeration. The notion that competition can drive selection is mundane; it happens in economics all the time.

I suspect many hold Darwinism in the awe they do precisely because they are not economists. They don’t appreciate that order can emerge from “blind” processes, without conscious design.

What’s more, it’s not sufficiently appreciated just how close the similarities are between natural selection in biology and the way the market selects among companies.

Sure, the idea that an environment selects out those best able to compete was not new. If resources are scarce, in a natural or an economic environment, only the few will survive. But as this Wikipedia entry points out, taken on its own, the term ‘Survival of the Fittest’ is a tautology. It simply says that those best able to survive will survive. It tells us nothing about what they actually do to enable that survival.

Darwin’s great insight was that the characteristics which equip a species for survival are passed down through the generations, multiplying and thus strengthening that species as time goes on.

This is where the analogy with companies breaks down. Firms use any number of methods to survive and make profit in the marketplace. Economic efficiency and customer service are what most like to claim to be the secrets of their success but often that is post-hoc rationalisation. What they actually do is make deals, form cartels, screw their customers and hope they don’t notice, indulge in costly internal wars, stab each other in the back and, quite often, simply stumble upon ideas that work which they then later claim to have been coherent strategies.

What many find difficult is being able to repeat this success. When management Guru Tom Peters wrote ‘In Search of Excellence’ in the 1980s, drawing lessons from successful companies, Business Week noted that, two years later, one third of the successful companies he told everyone to emulate were in financial difficulties.

This is hardly surprising because within any organisation there are a number of individuals with different motives, sometimes competing, sometimes co-operating and often not knowing what the hell they are doing. As the great J.G. March said, the most appropriate analogy for organisational decision making is a garbage can “into which various kinds of problems and solutions are dumped by participants as they are generated.” Shake the garbage can around and somehow a decision comes out. 

A McKinzie survey last year highlighted the ad hoc nature of decisions in organisations.

Despite the good intentions and intense involvement of senior executives in resource allocation, the results appear mixed. For example, corporate-level executives responding to the survey with an opinion indicate that 17 percent of the capital invested by their companies went toward underperforming investments that should be terminated and that 16 percent of their investments were a mistake to have financed in the first place. Business unit heads and frontline managers say 21 percent of investments should not have been approved and indicate another 21 percent should be terminated.

[T]he less-than-ideal combination of optimism, risk aversion, and one-off decision making is perhaps exacerbated by the prominence of corporate politics. Respondents say that behind-the-scenes lobbying and logrolling—and sometimes outright deception—are fairly frequent and seem to inhibit constructive debate and dissent throughout the resource allocation process.

OK, sometimes the metaphor of biological evolution does explain corporate performance. In some cases firms survive by adapting and go under because they keep doing the same things that worked in the past, long after the business environment has changed. But these are only some of the reasons why companies succeed and fail. Often a dinosaur will fall only to have its place taken by another equally slow and ponderous dinosaur. A random event can lead to a strong company being taken over by a weaker one.

Using biological evolution as a metaphor for corporate survival might look attractive but it ignores the random nature of decision making in organisations. Companies do not evolve in the same way as species. In only a few cases do they manage to reproduce and strengthen those characteristics that enabled them to get ahead of the game. Success in the corporate world is a lot more random than company executives would like us to believe.

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3 Responses to Evolution and natural selection in the corporate world

  1. chris says:

    I don’t think we disagree here. The point of my analogy – especially point 3 – was to stress that companies don’t have the foresight to see environmental change coming, any more than species do. They are blind.
    And you’re wholly right – the things that make a company successful are often just random accidents (mutuations), as happens with species.
    I was thinking of companies getting fit not by conscious efforts to do so, but rather by the market (imperfectly and slowly) selecting against unfit ones. Insofar as firms are “fit” it’s because unfit ones eventually die, not because bosses have the skill to make them so. What was all that I was saying about managerialist ideology?

  2. Rick says:

    Yeah, fair point. I suppose I’m not even sure you can define what a company getting fit looks like. As for the market selecting, firms can combine to rig the market just as humans combine to control their environment, so the ‘natural’ laws of selection no longer apply.

    I must read your stuff on managerialist ideology – I’ve been planning a post on that for some time.

  3. A little off topic maybe, but a request for people to think about the ethics of buying things like designer clothes. Do try and think about, for example, the materials the item is manufactured from, the human rights of the factories where they’re made and the ethics of retailers. Oh, and endeavour to share instead of discarding. Thanks!!!!

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