The paradox of strategic planning

In his book, “The Blind Watchmaker” Dawkins (1986) analyzes two approaches towards the explanation of the existence of complex systems such as personal computers, airplanes, motor cars and organisms. Here we include organizations like firms and universities in this array of complex systems. The first approach is the hypothesis of planned design and we are probably inclined to consider the engineering efforts underlying personal computers, airplanes and motor cars as examples of complex systems that are a product of planned design and this is in my view an, although limitedly, defendable position. Also the design of such systems involves elements of learning by doing beyond rational design. Most people that accept the theory of evolution of Darwin (and Wallace) regarding the evolution of biological species understand that biological complexity arose by a process that does not involve planned design but is a product of random changes and directed evolution by environmental selection. The apparent goal orientation arises by selection of the most efficacious information sets, the DNA, out of the variation that random mutations provide. This also applies to our species Homo sapiens that is a product of this evolutionary process rather than a creation based on intelligent design. We have argued that this also to an extent applies to organizations like firms and universities. Of course, their development involves elements of design, however, the inherent complexity of the information sets that characterize these organizations, leads to bounded rationality. Hence, planned design only limitedly applies to such organizations.

Variation of their information sets by limitedly deterministic change shapes these organizations by environmental selection of the most efficacious organizations. This has become an excepted feature of contemporary approaches to organizational economics where the evolutionary approach (Section 8.13) introduces this notion.

The theory we develop in this work analyzes the root causes of our inability to rely on

171 planned design in complex systems such as economic institutions like firms and other parts of society such as universities, as caused by information that is lacking in our “model” of these organizations. It particularly highlights critical bifurcation events in which these informational limitations do not allow reliable predictions of the outcome of our (management) actions.

In analyzing the history of the evolution of life, the element of chance in the path evolution takes is very clear. Random mutations at the DNA level provide an impetus for the evolution of increasingly complex and adapted organism if combined with competition and environmental selection. It is also clear that exogenous and endogenous changes in the environment are crucial in the bifurcation events that shape the path of evolution. The evolution of life thus has an important historical dimension in which crucial events shape the paths that are available for evolution to proceed. At every instant in history, the paths available for evolution to proceed, do not follow from the state of the organisms and their environment at that moment in time.

In this chapter, we analyze a limited sample of firms and their evolution over time. Also for firms, their evolution only limitedly results from “intelligent design”, critical bifurcation events, involving limitedly rational decision-making, seem to shape the evolution of industrial corporations. Different firms that at critical bifurcation points have similar opportunities to shape their subsequent development, may end up in very different markets using very different information sets (competences) later in their evolution. The rationale of the decision-making at the critical strategic events in the company’s development can mostly only be derived ex post.

This author has been working in strategic planning in industry for some twenty years.

Strategic planning involves designing the future of the company starting from an analysis of the present position of the company and its environment and the formulation of actions to shape its future evolution in a desired direction, i.e. to realize attractive strategic goals. We discussed an approach to strategic planning in Section 8.15. The discussion presented above may cast some doubts on the rationale behind strategic planning in view of the inherent limitations to the prediction of the future in complex systems. Are companies accessible to strategic design or is a paradox inherent in exercises in strategic planning? Of course, many if not all companies do engage in strategic planning of some sort and devote scarce resources to this activity. From an evolutionary perspective, this could be construed as evidence that strategic planning adds to the survival value of companies and hence must result in competitive advantage. I personally believe that this is the case but that the considerations above have important consequence for the practice of strategic planning.

The first aspect that needs explicit consideration in the process of planning is the element of uncertainty and unpredictability. Both our internal analysis, defining the companies present genotype and our ability to shape it in a future perspective, and the external analysis, the analysis of the competition and the other aspects of the environment, e.g. as defined by the Porter analysis (Section 8.14), should reflect the inherent limitations of our information. Both the internal and external analysis should reflect the main areas of uncertainty and risk.

Furthermore, we need to specify the assumptions on which our assessment of the likely trends in the future evolution of the environment and of the company rests. These provide a checklist if unexpected developments in the environment or internally occur. This may lead to the necessity to reconsider the strategic objectives of the company.

Another consideration in the design of the planning process, concerns the way in which we incorporate the co-evolution aspects of the development of complex systems and their environment as we highlight these in this work. This means that we cannot analyze the internal perspective in isolation from the external perspective, we should explicitly take into account the impact of our actions internally on the changes in the environment that result from these actions. Taking a static perspective that considers our firm and the environment as

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separately evolving, is inadequate.

Furthermore, we need to be careful if our analysis reveals that we need drastic changes in the information set characterizing our capabilities and competences. Here we risk reaching the limits of the changes allowed by the copying fidelity limit characteristic for complex evolving systems (Section 7.3). It may very well be that organic development does not allow the planned changes and that we need to consider cooperations, joint ventures or mergers and acquisitions to achieve our goals. Alternatively, our strategic goals may be unrealistic and a review of these goals may be necessary.

A no doubt important part of a proper strategic planning process concerns challenging existing beliefs and practices that underlie a company’s information set. If we do not challenge in this respect, the creative function of mutation of information sets that is one of the vital drivers of evolution, erodes. The balance between conservation and mutation should be carefully considered. If we completely avoid the risk and uncertainty inherent in changing the company’s genome, we risk being no longer able to react to changes in the competitive landscape or other aspects of the environment.

Another pitfall rests in assuming change in the competence base and the market position of our company in the period that defines the planning horizon, whilst neglecting the fact that also competitors and the other aspects of the environment change in that period. Strategy is a play on an evolving stage.

A further remark concerns the method used in the strategic planning exercise. Of course, it helps if we use a sound and well thought of method. However, we insist that the creativity of the stakeholders engaged in the exercise and the quality of their interaction in the planning process is far more important than mechanically working through the planning agenda the methodology prescribes.

15.5. Conclusion.

Obtaining generic conclusions from the observations on this limited sample of the

“ecosystem” of present-day industry proves a difficult task. A number of factors contribute to this difficulty.

Firstly, there is the nature of the material on which the analysis rests. As said, we use the companies’ perspective on their respective historical development as obtained from their own websites. Although the events that feature in the historic development are objective facts, the very selection the company makes and the present position of the company may affect interpretation of the importance of certain steps.

Secondly, the selection of companies reflects activities that are successful participants in the present-day landscape of the industry. Many of the emerging industrial activities of the past that did not grow into prosperity or have not survived, are not present in the sample. No doubt, their histories provide important clues to the evolutionary features of the industry as a whole.

Thirdly, the selection features companies with which the author is to a varying extent familiar.

Notwithstanding these difficulties and limitations, we attempt an analysis of some overriding features of the evolutionary tree.

We clearly recognize the importance of a change in the resource base of society in the appearance and the growth of new industrial activities. An example is the shift to fossil resources, initially coal in the first industrial revolution and later on to oil and gas in the second industrial revolution. The multinational Shell emerges from such a development. The precursors of Unilever initially emerge from the introduction of new resources for a butter substitute and for cleaning products. In these two cases, we detect signs of a cyclical interaction as both the availability of the resources and the activities of the companies to make

173 these resources available and useful in terms of products in demand in society, drive the evolution of the changing resource base. Industries and their resource base co-evolve.

A second evolutionary force results from the evolution of the science and technology base of industry. The appearance of modern chemistry revolutionizes the availability of new products to serve existing needs and makes it possible to serve new needs. The synthetic dyes are a case in point. Also the birth of the pharmaceutical industry traces back to new approaches to drug development (synthetic drugs). Also in this arena, we see signs of co-evolution. All the companies we studied engage in industrial research and interact with public research. In this way, the companies and the science and technology base of industry co-evolve.

What we also note is the importance of the interaction between public R&D in academia and institutes and captive industrial R&D. A case in point in this respect are the developments in biotechnology in the last three decades of the 20^th century. A bifurcation point in the development of biotechnology is the advent of genetic engineering in the early 1970s.

Academia pioneers the early development of the enabling technology but it becomes quickly integrated into an industry infrastructure through, in addition to captive in house organic entry, small start-up companies, and cooperations between established industries and these start-ups and/or the academic community. In addition, acquisition of startup companies by established players plays an important role. We see such efforts in almost all the companies in the sample we analyzed (e.g. Roche, DSM).

In addition, changes on the demand side result in forces that change the evolutionary pattern of the industry as a whole and in addition affect the fate of individual activities. Again, there is a cyclic interaction in which changes that originate on the demand side lead to developing new ways of satisfying that demand by industry. Alternatively, new technologies or new resources, made available by the initiatives in industry, lead to a growth of the demand in the market. We already stressed that the cyclic nature of the interaction between supply and demand defies a clear separation between cause and effect in such cases.

In the evolution of Shell, we see an example of such development. The combustion engine triggers demand for automotive fuels and Shell happens to avail of resources and technology to supply fuels for the combustion engine. This was instrumental in shaping the future of Shell and for that matter the combustion engine.

The emergence of the pharmaceutical industry, as witnessed by the companies Roche and Pfizer, provides another example of such a new demand. The marketing and technology efforts of emerging companies engaged in the development and the supply of such products satisfy this demand and trigger the growth of the pharmaceutical market.

An example of such a development is also clear in the history of the market for penicillin and the anti-invectives market in a broader sense. The success of penicillin derives from the scientific discovery of Penicillin by Fleming (1929). In society, there exists a clear need for anti-infectives, as infections are a major cause of death. Still Fleming discovery does not immediately lead to a booming market success; society does not avail of the technology to make large quantities available at affordable prices. At the end of the Second World War, this changes when the nature of the demand (military use) leads to industrial activities that change the supply side in such a way that larger quantities become available. This results from largely preexisting technology positions of established industrial players (e.g. Pfizer and Gist-brocades) and strongly soaring technology development efforts that lead to quickly decreasing prices and growing availability and demand in the years after the World War. This made anti-infective therapy an established part of medicinal practice. In addition, it heralded a period of strong growth of the pharmaceutical industry by the introduction of both a broader range of anti-infective products and new successful products in other therapeutic area. We again see a case of co-evolution of technology, industry infrastructure and market demand.

We also see such a development in the Unilever history, where the environment and the

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company were instrumental in the creation of the present food and personal care market and the presence in the market of present-day Unilever.

A factor that also needs highlighting is the strongly rising per capita GDP in the wake of the industrial revolution. This is both the result and the cause of the changing supply and demand pattern in the years after 1850. This is again an example of a co-evolution process. It is perhaps one of the most important co-evolution events in the history of humankind to date. It is no accident that all the companies in our sample find some of their roots in the second industrial revolution.

We also recognize another feature of the evolution of complex non-equilibrium systems in the companies in our sample. We refer in this respect to the importance of critical bifurcation points where strategic decisions shape the fate of the company and determine unknown future options for further development. These can drastically change the future appearance of companies even if they start out in markets or with competences that make the various options for further development possible at the moment of the strategic choice at the bifurcation point.

This is exemplified by the cases of Gist-brocades and Pfizer, where a critical event at the end of the Second World War, leads to very different future evolutions of the companies under consideration. The above remarks also point to a limitation of the practice of strategic planning. Future opportunities depend on decisions made at a point in time when these future opportunities are still unknown. Still the choices made determine whether the new opportunities will materialize.

In the sample of companies we analyze, we also recognize another feature that derives from the intrinsic limitations to the prediction of the future evolution in complex systems. In some companies, we still recognize the nature of the original initiative from which the company emerges in the resource base, the competence base and/or the market presence. This applies to Shell and to a perhaps lesser extent Roche. In the case of Gist-brocades, only the competence base in fermentation survives. For DSM its original position in the coal mining area completely disappears. This also applies to Pfizer whose mainstay today is in the development and marketing of ethical pharmaceuticals.

Finally, our analysis highlights that judicious use of cooperations, mergers, acquisitions and divestitures shapes, in addition to organic growth, the evolutionary fate of the companies in our sample.

175 CHAPTER 16. TRACING THE SOURCE AND THE DIRECTION OF EVOLUTION:

A SUMMARY.

16.1. Introduction.

In the foregoing, we analyze a wide range of evolutionary phenomena ranging from the very large stellar objects, to the very small, the molecular machinery underlying life phenomena. In this chapter, we present a round up and arrive at general features of evolution, both in material systems, e.g. organisms, and in immaterial systems, such as science and technology.

The first concept we reintroduce is the learning by doing cycle (Fig. 16.1) that is very basic to any type of evolution. We discuss this archetype of an evolutionary cycle in Chapter 6 in the context of the systems theory of evolution.

Fig. 16.1 highlights the pivotal role of information. All the systems we studied develop, progress and communicate information, be it in a tangible form (e.g. an organism’s DNA) or in an abstract or intangible form, such as in a scientific theory. The information translates in some kind of organization, e.g. the organism’s phenotype, or the products and services and other aspects of the manifestation of an industrial enterprise. In this process of translation of that information set changes appear, either by more or less directed change, e.g. by R&D or the gravitational force in the universe, or by error. This variation is vital, as it is the source of progress. The phenotype competes for scarce resources such as free energy or, in our broader interpretation in terms of the EVT formalism, economic value. We recognize many examples of such resources and we reiterate these in a general way in the next section. This competition may also take place in the intangible world, e.g. where rivalling scientific theories compete for explanatory power in the light of experimental evidence. This competition for scarce resources leads to selection of the most competitive phenotype and hence its related, changed, information set. The process leads to the selection of information sets that are coding for structures that are more efficacious with respect to the selection the environment provides.

This closes a positive feedback cycle that is the basis of sustained evolution. We extensively

Information

Organization Variation

Resources

Competition Selection

Fig. 16.1. Evolution through change by chance: The learning cycle.

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highlight that closing the cycle leads to a blurring of cause and effect.

In addition, a cause and effect cycle between the structures and their environment closes. This

In addition, a cause and effect cycle between the structures and their environment closes. This