Robust Adaptive Strategies

In 1988, I was wandering the floor of Comdex, the computer industry’s enormous annual trade show and could feel a palpable sense of anxiety among the throngs of participants. Since the birth of the IBM PC six years earlier, Microsoft’s DOS operating system had been the de facto standard of the industry, and the stability it had provided had led to explosive growth for the entire industry. But by 1988, DOS was beginning to show its age, and the big buzz on the floor of the show was “Are Microsoft’s days numbered?” Apple, then at the peak of its powers, had one of the largest, fanciest booths at the conference. Its dazzling graphical operating system made DOS look like an antique. Aggressive Sun Microsystems had teamed up with AT&T and Xerox to combat Microsoft with a graphical version of Unix called OpenLook. Across the hall, another powerful group of companies including Hewlett-Packard, Digital Equipment Corporation, Apollo, and Siemens Nixdorf had combined forces in a consortium called the Open Systems Foundation, which was pushing its version of Unix, also with a slick graphical user interface. Meanwhile, IBM was determined not to let Microsoft advance on it again. The highlight of its booth was OS/2, a product in which it had invested heavily, and which it claimed combined DOS compatibility with the power of Unix and the Mac’s ease of use. There was something very curious about the Microsoft booth. First, it was by no means the largest or splashiest booth. Microsoft had been quite successful, but was still dwarfed by many of its competitors. More important, the content of the booth was more Middle Eastern bazaar than trade-show booth. In one corner, Microsoft was previewing the second version of its much delayed and much criticized Windows system, which as yet had little significant market share. In another corner, the company was pushing the virtues of its latest release of DOS version 4.0. In yet another area, it was displaying OS/2, which it was codeveloping with IBM. And across from OS/2, it was demonstrating major new releases of Word, Excel, and other applications for the Macintosh. Although Microsoft was a distant second to Lotus and WordPerfect in DOS applications, it had quickly become the leader in applications for the Mac. Finally, in a back corner, it was showing SCO Unix.

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References

1. See P. Ghemawat, Commitment: The Dynamic of Strategy (New York: Free Press, 1991).

2. For a discussion of complex adaptive systems and business, see:

E.D. Beinhocker, “Strategy at the Edge of Chaos,” McKinsey Quarterly, number 1, 1997, pp. 24–39.

For a general overview of the science behind complexity, see:

M.M. Waldrop, Complexity (New York: Simon & Schuster, 1992).

For technical discussions of complexity and economics, see:

P.W. Anderson, K.J. Arrow, and D. Pines, eds., The Economy as an Evolving Complex System (Redwood City, California: Addison-Wesley, 1988); and

W.B. Arthur, S.N. Durlauf, and D.A. Lane, eds., The Economy as an Evolving Complex System II (Redwood City, California: Addison-Wesley, 1997).

3. For a discussion of punctuated equilibrium in complex systems, see:

P. Bak, How Nature Works (New York: Springer-Verlag, 1996).

4. For a discussion of path dependence as applied to economics, see:

W.B. Arthur, Increasing Returns and Path Dependence in the Economy (Ann Arbor, Michigan: University of Michigan Press, 1994).

5. See J.H. Holland, K.J. Holyoak, R.E. Nisbett, and P.R. Thagard, Induction: Processes of Inference, Learning, and Discovery (Cambridge, Massachusetts: MIT Press, 1986).

6. See D. Kahneman, P. Slovic, A. Tversky, Judgment under Uncertainty: Heuristics and Biases (Cambridge, England: Cambridge University Press,1982); and

M. Bazerman, Judgment in Managerial Decision Making, third edition (Chicago: Northwestern University Press, 1994).

7. Evolution can be thought of as a general purpose process for solving complex dynamic problems. See:

J.H. Holland, Adaptation in Natural and Artificial Systems (Cambridge, Massachusetts: MIT Press, 1992).

As such, biological evolution is just one sub-class of a universal class of evolutionary processes. I take the position in this article that the search for business strategies is another sub-class of this more general class. So, although there are differences in biological and business evolution, both sub-classes are subject to the same general principles that govern all evolutionary systems. This is stronger than saying that business is metaphorically like biology, and there are some interesting analogies to be made. Rather, this position claims that any principles that make for effective or ineffective evolutionary searches in general will also apply to business strategy.

8. This thought experiment is borrowed from:

D.C. Dennett, Darwin’s Dangerous Idea (New York: Touchstone, 1995), pp. 107–113.

9. For general discussions of fitness landscapes, see:

S. Kauffman, At Home in the Universe (New York: Oxford University Press, 1995); and

Dennett (1995).

For a technical discussion, see:

S. Kauffman, The Origins of Order (New York: Oxford University Press, 1993).

10. A real fitness landscape would have a very large number of dimensions, but a three-dimensional space is easier to visualize, so I have discussed the landscape in three dimensions, although the same principles apply in higher dimensional spaces.

11. Fitness landscapes can be represented mathematically and exhibit regularities that provide insights into how evolution works. For example, Kauffman and others have borrowed the mathematics of spin-glasses from physics to explore the characteristics of evolutionary searches on fitness landscapes. See:

Kauffman (1993) and (1995).

12. Kauffman (1995).

13. See J.C. Collins and J.I. Porras, Built to Last: Successful Habits of Visionary Companies (New York: HarperCollins, 1994).

14. From presentations by J. Donehey and G.Overholser, Capital One (Boston: Ernst & Young Embracing Complexity Conference, 2–4 August 1998).

15. Kauffman (1993) and (1995).

16. See M.A. Baghai, S.C. Coley, and D. White, The Alchemy of Growth: Kickstarting and Sustaining Growth in Your Company (London: Orion Business, 1999).

17. See M.A. Baghai, S.C. Coley, R.H. Farmer, and H. Sarrazin, “The Growth Philosophy of Bombardier,” McKinsey Quarterly, number 2, 1997, pp. 4–29.

18. See P. Ghemawat and P. Del Sol, “Commitment vs. Flexibility,” California Management Review, volume 40, Summer 1998, pp. 26–43.

19. See C. Fishman, “The War for Talent,” Fast Company, August 1998, pp. 104–107.

20. See K. Leslie and M. Michaels, “The Real Power of Real Options,” McKinsey Quarterly, number 3, 1997, pp. 4–22. See also:

A.K. Dixit and R.S. Pindyck, Investment under Uncertainty (Princeton, New Jersey: Princeton University Press, 1994); and

T.A. Luehrman, “Strategy as a Portfolio of Real Options,” Harvard Business Review, volume 76, September–October 1998, pp. 89–99.

21. See, for example:

P. Schwartz, The Art of the Long View (New York: Doubleday, 1991); and

K. van der Heijden, Scenarios: The Art of Strategic Conversation (New York: Wiley, 1996);

P.M. Senge, The Fifth Discipline (New York: Doubleday, 1990);

H. Courtney, J. Kirkland, and P. Viguerie, “Strategy under Uncertainty,” Harvard Business Review, volume 75, November–December 1997, pp. 66–79.

22. Donehey and Overholser (1998).

Acknowledgments

I would like to thank Bill Barnett, Kevin Coyne, Renee Dye, Dick Foster, Sarah Kaplan, Saul Rosenberg, my colleagues in McKinsey’s Strategy Theory Initiative, and Costas Markides for their comments on earlier drafts. I would also like to thank Stuart Kauffman of the Santa Fe Institute and the Bios Group, and Brian Arthur of the Santa Fe Institute for their many contributions to my thinking on this topic. All shortcomings are mine.