Strategic Capabilities live and die in a Darwinian environment

Fast rabbits do better in the woods than slow rabbits. They have a better chance to outrun their predators, survive, reproduce and transmit to their offspring the key quality that helps them survive: speed. Slow rabbits, on the other hand…well, you know what usually happens to them!

Natural selection helps explaining why, in an environment where predators abound, slow rabbits tend to die young, and while, after several generations, fast rabbits become prevalent. The fittest will survive and occupy a niche in the ecosystem.

Competition in market-driven economies is analogous. The firm that is able to deliver the best value proposition to its target segments with the greater economic margin will expand its market share and establish a prevalent position in its industry segments. In this case, “the fittest” is the one with a competitive advantage, and therefore will have a greater chance to find an economic niche where to survive and grow.

What can modern evolutionary biology teach us about how organizational capabilities are created, developed or discarded in the business world? Actually, we can learn a lot about managing enterprise capabilities for competitive advantage if we extend this analogy in greater detail.

Rabbits´ speed is a phenotype. It describes an actual observed property of an organism (rabbit). Fast and slow rabbits differ in their genes. Fast rabbits´ genotype is the most influencing factor defining speed, but it is not the only one. The environment and the gene set (genotype) interact in complex ways to define the observable phenotype.

In the business world, cost leadership, superior customer value, greater flexibility adapting to environmental changes … those are all phenotypes. Capabilities influence greatly these key competitive elements, but are not the only factor. So, competitive advantage has both a phenotype and a genotype. The first one is observable to stakeholders, in particular, customers, and becomes key to survive and prosper in the marketplace. It is akin to the rabbits´ speed. Capabilities are the genotype of competitive advantage. Like the fast rabbits´ genes, they are difficult to observe, but we know they are there, because they manifest themselves in the phenotype (competitive factors).

Some firms with superior capabilities and resources have been unable to create competitive advantage out of them (think of Xerox and the Windows graphical user interface – GUI). This “gap” in the causal relationship between genotype and phenotype, between capabilities and superiority in competitive factors, which are supposed to lead to survival and prosperity, is of paramount importance to senior executives in charge of strategy. Strengthening the causal relationship between capabilities and its manifestation as competitive advantage in the market place is a capability in itself, and a scarce one indeed!

The dynamics between genotype and phenotype in the natural world also helps us understand how capabilities are born, develop, mature and die in the business world.

Modern evolutionary biology (a synthesis of evolution theory and genetics) identifies several key mechanisms through which evolution takes place: gene flow, mutation, natural selection, adaptation, and speciation. They apply at different levels: population, individual, and genes. Let us review them briefly before reflecting on what they can teach us about the dynamics of strategic capabilities in the business world.

• Gene Flow: new genes flow in and out of population, as a result of migration. Environmental factors (physical agents, barriers) may stimulate or inhibit gene flow.

• Mutation: change in a cell’s genome, resulting from unexpected errors in DNA replication or caused by external factors (chemicals, radiation, pathogens). “Phenotype plasticity” determines whether variation in the genotype translate in variations in the phenotype. High plasticity means the phenotype variations is more influenced by changes in the environment than by genotype variations. Anyway, only gene variations are transmitted through reproduction, not phenotype variations.

• Natural selection: gene flow and mutation combine to expand the variation in the gene pool of a population. Variability in genotypes influences variability in phenotypes across individuals; some of them have a better fit with the environment than others. The “fittest” has the phenotype that translates into a better chance of survival. That is our fast rabbit. The least fit has a hard time surviving predators and gaining access to key resources. Differential reproduction follows and the fittest’s genotype expand in the population.

• Adaptation: after several generations, the above processes combine to produce a better adaptation of the population to the habitat. Individuals in the population tend to exhibit the fittest’s phenotype.

• Speciation: macro-environmental factors create barriers between groups of individuals in the original population. Now, each group faces different habitats which change independently. Each group keeps adapting to its particular habitat. After many generations, adaptation produces notable difference in each group phenotypes. Indeed, the fittest here is different enough than the fittest there, and new species have evolved.

If competitive advantage in the business world has both a genotype (capabilities) and a phenotype (competitive factors that determine survival and growth), what are the equivalents of these mechanisms in the marketplace?

• Capabilities import and export – Gene Flow: organizations import and export capabilities from its environment. Alliances and joint ventures, consultants, benchmarking and reverse engineering, “best practice adoption”, mergers and acquisitions, all of them are vehicles through which capabilities’ DNA get in and out of the firm. On the other hand, barriers that isolate the firm from its environment inhibit capabilities flow.

• Capability variation – Mutation: variations in the elements that constitute capabilities may be beneficial or not (as mutations in the natural world). A change in a process workflow may create undesirable variation, or it might create an unexpected better performance, which later becomes the source of an innovative work-system. If the elements that constitute capabilities are immutable, innovation will never result and the firm will not be able to produce competitive factors (phenotype) in response to environmental demands. It will fail to adapt and will eventually die. In the natural world, mutation is not a “directed” process. In the firm, innovation may result from an emergent spontaneous bottom-up variation that is later recognized as beneficial and encouraged, or it may be a deliberate directed top-down variation that is designed.

A firm with high “phenotype plasticity” is able to leverage a given capability set and adapt it to different environmental opportunities and challenges. The same genotype (capabilities and resources) translates into different effective phenotypes (competitive factors) according to the demand of different market segments. Think of 3M and its small group of core competences (technologies) that are leveraged across hundreds of product-customer combinations.

• Natural selection: capabilities, being them native or imported, established or emergent, translate into competitive factors, through a genotype-phenotype causality link. Quality, speed, service, flexibility, cost management are exposed to different business segments. The best fit tends to survive and grow, reproducing its success across the market-space both organically and through acquisitions. Of course, evolutionary biology does not see this process as directed. In the business world, two processes are present: (a) a deliberate intention to align a value proposition to a business segment, and (b) a learning process that watches the environment’s response to diverse value proposition, discarding failed phenotypes (slow rabbits) and refining the successful ones to maximize fit.

• Adaptation: after several years of learning and growth, the firm refines its match between capabilities (genotypes), competitive factors (phenotypes) and business segments´ expectations of value. Think of Wal-Mart’s refinement of its competitive concept of discount retailing over decades.

• Speciation: as growth continues across countries, product lines, customer segments and channels, it is difficult for the firm to maintain homogeneity. Differences in customers´ demands across these strategic dimensions (habitats) produce segmented adaptations. When the value propositions (segmented phenotypes) start to differ significantly, new competitive species have emerged, and it is time for the corporation to recognize these differences in its strategy and organization.

This analogy suggests key messages for senior executives in charge of the strategic management of enterprise capabilities for competitive advantage:

• Selective Permeability: an isolated firm creates a closed gene (capabilities) pool, and we know what happens in closed population breeding. A process of capability flow management should be directed towards selective enhancements to core capabilities, controlling both dilution and leakage risk. Dilution means that core capabilities may lose their identity, typical of firms that are not conscious of the genotype underlying their competitive advantage. Leakage means that unmanaged capabilities outflow may strengthen competitors.

• Directed and Spontaneous Innovation: variation in the capabilities pool is a key factor maintaining adaptability to the environment. A process of capability innovation should be able to both, manage deliberate innovation and create the environment for emergent innovation. It should also discern between innovative-beneficial and unwanted variation.

• Capability Deployment and Refinement: an effective competitive advantage results from an alignment between the competitive genotype (capability), phenotype (competitive factor) and market-space (habitat). Selective permeability and managed innovation create variation in the capabilities pool and with it, the building blocks for constructing value propositions and business models to be presented to the market. A process of capability deployment and refinement should be able to find effective ways to leverage established and emergent capabilities across business lines (remember “phenotype plasticity”). The same process should monitor market responses and manage learning and adaptation to maximize fit across [capability – competitive factors – market space] sets.

• Expand on your Success: when the firm has developed a great match between capability (genotype) – competitive factor (phenotype) – market space (habitat), it has identified a promising business concept that represents a great source of value for stakeholders, and it should make it grow as fast as it can. A couple of caveats, though; a) each merger and acquisition represent both an opportunity to expand the successful business concept, and a risk of breaking the virtuous alignment between its elements, and b) what seems like a similar habitat (product, customer segment, geography, channel) at the time of entry, may require minor (or major) adaptations in competitive phenotype.

• Differentiate Strategy and Organization after Diversification: multidimensional growth (across products, segments, geographies and channels) will create variety, and, according to Ashby’s law of Requisite Variety, will demand equivalent variety in strategy and organization. A competitive concept with too much variety may require creating an organizational architecture combining strategic business units and shared corporate functions. Competitive phenotypes should reside into the strategic business units (you have created different species!), whereas competitive genotypes (capabilities) will be split between the elements common to all phenotypes (located in the corporate functions) and elements specific to each phenotype (located within the strategic business units).

By the way, we are aware that readers may have different personal positions regarding the intelligent design vs. evolutionist controversy, and we certainly have no intention to meddle into that issue. Our intention, using this analogy, is to look at an interesting strategic topic from a fresh angle. Although we developed the parallelisms using modern evolutionary biology, the recommended capability management processes demand active intervention from senior executives. Capabilities may live and die in a Darwinian environment, but firms and markets are human creations, and as such, they do have an intelligent designer!