Duke Seminar: Punctuated Equilibrium Francesco Castellaneta, Guia Beatrice Pirotti,

1. Duke Seminar: Punctuated Equilibrium Francesco Castellaneta, Guia Beatrice Pirotti, Ph.D in Business Administration and Management, 3° year

2. Proposition 1 alt: Organizations are always changing, we just often do not recognize the changes when we see them

3. Agenda • Continuous Change: the non-revolutionary approach of change and a new unit of analysis • Continuous Change vs Punctuated Equilibrium: a methodological problem • Continuous change and some limits in recognizing it

4. Continuous Change DEFINITION OF CONTINUOUS CHANGE • Change is a non-revolutionary, gradual, incremental and continuous phenomenon (Miller and Friesen, 1982). • Non-revolutionary views suggest that fundamental organizational transformation can be observed by comparing organizational activity patterns over distant points in time, though no specific transforming event may be identifiable. UNIT OF ANALYSIS • Non-revolutionary views of organizational transformation emphasize the relative independence of organizational subunits as managers seek to adapt to changes in their local internal and external environments. • Over time, as subunits repeatedly alter their goals and relationships to local environments, the organization as a whole becomes transformed.

5. Punctuated equilibrium: this is what we see, not what happens “Technological progress constitutes an evolutionary system punctuated by discontinuous change” (Tushman and Andreson, 1986: 440) BUT • What do we really know about what is behind technological breakthroughs? • Is it possible that what appears to be an unexpected and unforeseentechnological change, is actually a result of a continuous change?  what seems to be in appearance a revolutionary transformation, if we consider only the outcome, could be in substance a non revolutionarytransformation, ifweconsider the proccess  we are confusing the outcome (revolutionary) with the process (unrevolutionary)

6. Not only successes but also failures! Do we really know the other face of the coin? • Successful new firms are just a very small part of the huge amount of new firms that failed. Only 45% of new single establishment businesses are still alive five years after starting (US data) … and it does not mean that they do a lot of money • We see only successful new entrants. What do we know about firms that failed? Is it possible that many new entrants, that failed, contributed to create a competence-destroying technology but only few (or one) appropriated economic results? • The new entrant that we consider as the initiator of the competence-destroying discontinuity invented just part of it, while it appropriated all the economic results of the invention • Entrepreneurship literature on “re-distributive ventures” (Davidsson, 2003). • We do not see failures, but also trials

7. Some suggestions To see not only the outcome but also the “hidden” process, it could be important to analyze the evolution and interaction of routines. They explain how organizations react to their environments while updating the rules that govern their responses (Levinthal and March, 1981) Sastry (1997) proposes two change management routines to integrate the theory of P.E: • Fit: match between the organization’s strategic orientation and that required by the environment (Drazin and Van de Ven, 1985). A routine for monitoring organization-environment consistency. • Trial period: the trial period routine enforces a process of continuous implementation of changes made of trials and errors.

8. Limits in recognizing change Change is continuous but there are some limits in recognizing it: • cognitive barriers • motivational barriers • obligations • decoupling.

9. Cognitive barriers Cognitive barriers: Limits in the interpretation of reality and on the awareness of alternatives make difficult to recognize the changes. In particular, TMTs do not recognize organizational changes that do not fit their mental schemata and subjective views (Kuhn, 1970)

10. Motivational barriers Motivational barriers: pain of loss, the uncertainty and the fear of failure can be a limit in recognizing a change. A form of reluctance to recognize change, based on wishes to avoid losing opportunities, losing power or failing at more difficult tasks (Levinson, 1978)

11. Obligations barriers Obligations/normative barriers: The networks of interdependent resource relationships and value commitments generated by the system make difficult to recognize the change. Desire of conformity to others’ expectations and needs (Levinson, 1978)

12. Decoupling: declaring the opposite of what you do • The literature on symbolic management (Fiss and Zajac, 2003) says that organizations sometimes proclaim that they change (to be conform to demands for strategic change) while they do not change • It could be also the other way around: you change, while you declare that you are not changing.

13. Where do competence-destroying discontinuities come from? An example (1) • A new entrant has recently proposed to the market a default prediction model (default risk of a company) based on a model imported by physics that is usuallyusedtopredict the behavior of liquid in certain machines. He knows this model because during his graduate thesis, as physicist, worked on this model. • This has been considered as a new competence-destroying technology compared to other technologies based on “old” models from finance and statistics .  this model predicts faster and better changes in the default risk probability produced by changes in the business environment and it is a “learning model”

14. Where do competence-destroying discontinuities come from? An example (2) If we run a quantitative study we see a new entrant that brings in the new competence-destroying technology… BUT …this is the result of many changes, that happened thanks to the contribution of many organizations: • two consulting firms worked for two years on this project. They never developed something for the market. He knows that several other consultancy firms were working on similar models • he worked in a consulting firm that spent a lot of money on this model without producing anything • during his Ph.D., several professors worked on this model • due to Credit Crunch, banks invested a lot on his model, giving access to data and “fresh” money to accelerate the development of the model • … • he patented the model and other firms cannot use it. IN THE END (1):we see only one firm with a competence-destroying technology, but we do not really know where it comes from IN THE END (2):it is important to distinguish between the processes of change and their outcomes (Gersick, 1991: 30)

15. Reduction of resistance to change: when incremental changes yield fundamental transformation RQ.1: Under what conditions, will incremental changes yield a fundamental transformation? Theory: The role of resistance to change (Romanelli & Tushman, 1994) that prevents small changes from yielding a technological discontinuity HP.1: Whenever the resistance to change is reduced, small changes will accumulate incrementally to yield a fundamental transformation.

16. Reducing the resistance to change: the role of motivation RQ.2: How can organizations reduce the resistance to change? Theory 1: Inertia can be broken (Romanelli & Tushman, 1994: 1144) without waiting for a severe crisis in the performance of an organization (Tushman & Romanelli, 1985: 179). Organization can motivate (Gottschalg and Zollo, 2007) people to introduce changes that can yield fundamental transformation eg.: corporate venture capital. Theory 2: three types of motivation: extrinsic, hedonic and normative  not only incentives HP. 2: the more employees are motivated to introduce changes, the higher the probability that changes will yield a fundamental transformation