1 AN EVOLUTIONARY THEORY OF INTRA ... - Semantic Scholar

AN EVOLUTIONARY THEORY OF INTRA-ORGANISATIONAL COMPETITION

Julian Birkinshaw Associate Professor London Business School Regent’s Park London NW1 4SA United Kingdom Phone: (44) 207 262 5050 [email protected]

Mats Lingblad Doctoral Candidate London Business School Regent’s Park London NW1 4SA United Kingdom Phone: (44) 207 262 5050 [email protected]

Version May 1, 2001

A version of this paper will be presented at the Academy of Management meeting in Washington, 2001. This is work in progress. Comments are welcome, but please do not reproduce, quote, or cite without prior permission of the authors. Correspondence to the second author listed.

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ABSTRACT

The purpose of this paper is to put forward a theoretical framework and research agenda on the phenomenon of competition inside organisations. We argue that this phenomenon has not received due attention from academic researchers or indeed from practising managers. We undertake a review of the literature to show that it is more widespread than usually realized. Then we put forward a research model based on evolutionary theory (Campbell, 1965). We argue that intra-organizational competition emerges through a process of internal variation in the face of environmental uncertainty, and that it endures until internal selection processes terminate it. Propositions are developed relating the level of environmental uncertainty, the costs of duplication and the level of decentralization of decision making in the organization to intra-organizational competition.

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The purpose of this paper is to put forward a theoretical framework and research agenda on the phenomenon of intra-organisational competition, by which we mean duplication or overlap of activities within the boundaries of the firm1. For example, there may be two product development groups trying to solve the same technological problem, two business units producing competing products, or two distribution channels serving the same customer group. All of these, we argue, are common phenomena in large firms, and yet the academic literature offers very little coherent insight into how or why such intra-organisational competition occurs.

An exploration of intra-organisational competition faces two major obstacles. First, at an academic level, the concept is not well established. Academics are familiar with the concept of an internal market (March and Simon, 1958; Williamson, 1975) as a mechanism for allocating resources within the boundaries of the organisation, and as such they recognise the notion that organisational units and individuals compete for resources. But our definition of intra-organisational competition goes one step further, in that it is concerned with those cases where duplicate activities run in parallel inside the firm. This is antithetical to the traditional logic of how resources are allocated in organisations. Second, the empirical phenomenon of intra-organisational competition is not well recognised, even by those companies that engage in it. As we will show later, intra-organisational competition is typically dispersed over several business units, and often lasts for only limited periods of time, so it is a phenomenon that ends up being managed on an exceptional basis, rather than in a systematic manner. Compounding this problem, intra-organisational competition is typically viewed very negatively by practising managers, because it is seen as a waste of resources and indicative of a lack of control. Organisations are interested in projecting decisiveness, not lack of control. However, there are sporadic references to the positive sides of intra-firm competition. For example, Eisenhardt and Galunic (2000: 96) argue that "coevolving companies let collaboration and competition coexist… while senior managers don't actively seek out competition, they don't discourage it either". Similarly, Nadler and Tushman (1999) argue that one of the key strategic imperatives for large firms today is how to manage "intraenterprise cannibalism… the need to develop and support new strategies … that might eventually dry up existing revenue streams". While little further discussion is offered as to

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We will justify this definition later in the paper. However, at this stage it is important to acknowledge that internal competition can also be viewed more broadly to encompass such things as competition for resources, rather than competition between resources.

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how intra-firm competition might be managed, these and other recent papers suggest that the phenomenon is worth consideration.

The paper is in four parts. In the first part, we focus on the body of the literature that addresses - to varying degrees - the phenomenon of intra-organisational competition. In the second part of the paper we put forward our theoretical model of intra-organisational competition using the logic of evolutionary theory. In the third part we develop a set of propositions. Finally, the fourth part of the paper offers a discussion of the key themes in the paper.

LITERATURE REVIEW Scope of intra-organisational competition Intra-firm competition can occur at many levels and in many different ways. In terms of level of analysis, competition is classically viewed as the mode of interaction between firms in the same industry (Marshall, 1925; Porter, 1980). The focus of the current paper is on competition between organisational units. This level of analysis extends from competition between two groups working for example on rival development projects through to two business units with competing product offerings. The second key parameter is the nature of competition between units. Here again the picture is complex, because competition can occur in a large number of ways. As noted above, the most well developed line of thinking here is that units compete with one another for financial, human and physical resources, to the extent that such resources are in scarce supply and they must therefore be allocated to the most worthwhile opportunities. Using the metaphor of the internal market, this is a large but fragmented body of literature that extends from economics through accounting to management (Arrow, 1959; March and Simon, 1958; Williamson, 1975; Eccles, 1985; Hennart, 1993; Halal, 1994; Buckley and Carter, 1997; Hamel, 1999; Birkinshaw and Fey, 2000). Our concern in this paper is with a rather different form of competition in which two or more units undertake duplicate activities. Whereas the focus in the internal market literature is on competition for resources, the focus here is on competition between resources. In its extreme form, this would involve two parallel value-chains both housed within the same organisation, and with the outputs from these value chains as directly-competing products. Finally, it is worth reiterating that intra-organisational competition can have both positive and negative consequences. While the purpose of this paper is geared towards examining the positive implications of intra-organisational competition, our approach in the literature 2

review below is to suspend all normative judgements and to offer as balanced as a view as possible.

While there is no body of literature per se on intra-organisational competition, it is possible to pull together insights from a number of different fields that collectively provide us with considerable insights into the phenomenon. As a first-cut at organising this literature, we can identify two different forms of intra-organisational competition that we label parallel development and coexistence respectively. Parallel development is a transitory form of intrafirm competition that typically only exists for a limited period of time. Coexistence is an enduring form of intra-firm competition that potentially could go on for an indefinite period. As will become apparent the line between these two is not clear-cut.

Parallel development The most extensive documentation of the phenomenon of intra-organisational competition is found in the innovation literature, and in particular in the literature that is concerned with the process of innovation (Kidder, 1981; Peters and Waterman, 1982; Quinn, 1988; Wheelwright and Clark, 1992; Spender and Kessler, 1995). The process can be either planned or emergent from the point of view of top management (Mintzberg, 1978) The logic behind these forms of intra-organisational competition, from a managerial perspective, is straightforward - parallel development is beneficial when unconventional ideas are being tried out, when speed is critical, and when the costs of duplication are small. However, these ideas are rarely tied back to an underlying theory, the only notable exception being in the concept of organisational slack (Cyert and March, 1963; Bourgeois, 1981; Sharfman, Wolf, Chase and Tansik, 1988; Nohria and Gulati, 1996). While slack has both positive (Cyert and March, 1963:189; Nonaka, 1990) and negative connotations (Leibenstein, 1969), the key insight from Nohria and Gulati (1996) is that the relationship between innovation and slack is curvilinear, i.e. slack promotes innovation up to a point, after which it reduces innovation. Intraorganisational competition can be seen as one manifestation of organisational slack, which suggests the proposition that such competition is likely to be good for innovation, but only up to a point.

The organization theory and strategic management literatures also recognise the phenomenon of intra-organisational competition, on a slightly higher level. Whereas the focus in the innovation literature was parallel development at the level of a particular R&D project, the 3

focus here is parallel activities at the level of the business unit or division. An example is the creation of a separate business unit alongside existing business units whose mandate, at least in part, is to cannibalise the existing business. IBM decided to create a separate PC division in Boca Raton, Florida in 1991 (Roberts and Berry, 1985; Teece, 1987). While the logic for placing new ventures in a separate business unit is well-established (Drucker, 1974; Galbraith, 1982; Burgelman, 1983), the idea that the new venture should actively compete with existing businesses deserves further scrutiny. The most persuasive line of argument comes from Christensen (1997), who showed that disruptive technological changes are almost impossible for an incumbent firm to latch onto. Christensen argued that the only way for an incumbent firm to surmount this problem was to establish a separate business unit to focus on the new technology.

A second form of parallel development occurs when two or more business units in the same organisation move into the same technology or market space. Galunic and Eisenhardt (1996) showed that this form of intra-organisational competition was common in Omni (a disguised company name), largely because business unit managers were given a high level of autonomy to move into new technologies and markets as they saw fit. However, once a competitive situation was identified, the business units in question typically got together with senior executive support to decide how to resolve it. Birkinshaw (1996) offer similar insights but from the perspective of the foreign subsidiary company that occasionally found itself competing directly with other parts of the corporate system. Zander (1999) studied the degree of duplication and internationalisation of R&D activities in Swedish multinationals. He found overall duplication of technological capabilities to be modest, but that the differences between firms were large.

The underlying driver of these forms of intra-organisational competition is technological change coupled with uncertainty. Implicitly, both bodies of work build on the technological life cycle (Utterback, 1994), so that as one technology supplants another there is a period of turbulence during which incumbent firms attempt to transition from the "old" to the "new" (Markides, 1998). During this transition, intra-organisational competition is acceptable because the old and the new exist alongside each other.

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Coexistence The other major form of intra-organisational competition is where multiple overlapping products, brands, or channels coexist in the marketplace. Procter and Gamble is a well-known example of this, with multiple competing brands of soap, toothpaste, and detergent in the marketplace (Peters and Waterman, 1982; Solomon and Hymonitz, 1987). The same phenomenon can also be seen in a number of other industries including cigarettes, automobiles, tires and hotels (Mason and Milne, 1994; Financial Times, 2000; Useem, 1999). The basic logic is one of market segmentation. In order to cater to the full scope of customer needs, the organisation offers multiple different products, each one targeting a different segment of the marketplace. The term cannibalisation is used in the marketing literature for this form of intra-organisational competition (Chandy and Tellis, 1998).

One major line of research in this area has looked at the optimal level of product variety an organisation should offer using modelling techniques (Lancaster, 1979; Green and Krieger, 1985; Kekre and Srinivasan, 1990). Another has looked at the introduction of new products, with regard to the timing of entry and the positioning of the new product vis-à-vis existing ones (Conner, 1988; Ghemawat, 1991; Moorthy and Png, 1992; Mason and Milne, 1994; Mazumdar, Sivakumar, and Wilemon, 1996). In both these literatures there appears to be an underlying belief that cannibalisation is something to be avoided, which makes good sense from an efficiency perspective but is not entirely consistent with the pervasive evidence for the phenomenon (Mason and Milne, 1994). However, this inconsistency is largely resolved when the state of competition and uncertainty in the marketplace is taken into account. Nault and Vandenbosch (1996: 342) examined the conditions under which a firm might cannibalise an existing product with a next-generation product, and showed that "the severity of competition, rather than the costs… are what forces firms to cannibalise at a loss". Similarly, Sorenson (2000) studied product variety in the computer workstation industry, and showed that "product variety becomes less valuable as the total number of products on the market increases, but it increases in value as uncertainty makes the accurate prediction of demand difficult".

This discussion suggests that coexistence between competing products is not necessarily forever. At one end of the spectrum there are cases like Procter and Gamble and General Motors that have had coexisting brands in the marketplace for decades. At the other end of the spectrum, intra-organisational competition takes the form of a gradual phasing in and out 5

of products in the face of technological or market change. In many ways, this is a very similar process to what was discussed earlier as parallel development, the primary difference being the duration of the period with intra-organisational competition. As a case in point, consider British Airways' decision to launch a no-frills subsidiary called Go, which competes directly with BA on many routes. This could be viewed as a case of parallel development driven by a shift in the marketplace towards low-cost travel, in which case the next step is for BA to integrate it back into the parent company. Alternatively, it could be viewed as a case of coexistence driven by a recognition by BA that it was missing out on a large cost-sensitive customer segment, in which case it could carry on indefinitely in competition with BA. The fact that both scenarios are plausible raises an important point, namely that the trajectory of intra-organisational competition is not pre-determined.

Conceptual Integration Intra-organisational competition manifests itself in a variety of ways and there are a number of consistent themes that crop up. While it is tempting to say that each form of the phenomenon is sufficiently different that it should be explained separately, our belief is that it is possible to put forward a single conceptual model that accounts for intra-organisational competition in all its different manifestations. Parallel Development Activity X Activity Y Competition Establishment

Termination

Coexistence Activity X Activity Y Competition Establishment

(No termination)

Figure 1. Conceptualising intra-organisational competition 6

The first step in conceptualising intra-organisational competition is to see it is as a process. A phase of intra-organisational competition begins when two or more overlapping activities are started, and it comes to an end when all except one are closed down. Figure 1 illustrates this point. Viewed in this way, intra-organisational competition is a process with two critical events: (1) establishment and (2) termination. Parallel development, using this framing, involves both events. Coexistence, on the other hand, involves establishment but no termination. This conceptualisation of intra-organisational competition has two implications. First, it highlights the potential of evolutionary theory as a theoretical anchor for the phenomenon, with establishment as a process of internal variation, and termination as a process of internal selection. Second, it allows us to make a study of internal competition tractable by focusing on the key events of establishment and termination, and the factors that cause each to occur.

In the next section we pursue these implications in detail.

THEORETICAL DEVELOPMENT Before presenting the evolutionary perspective in detail, it is worth explaining why the other obvious theoretical approach, namely the internal market perspective, was not used. As noted at the outset, there is a body of economics-based literature that explores various aspects of the internal market (Polansky, 1992; Hennart, 1993; Halal, 1994; Zenger and Hesterly, 1997). The problem with this approach, however, is that there is considerable evidence in the literature to suggest that firms and markets are distinct modes of governance, and consequently that the "internal market" framing is of limited utility. For example, the use of price mechanisms in firms and markets is qualitatively different. Hayek (1945) stated that the price mechanism works through incorporating “the knowledge of the particular circumstances of time and place”. For this to be accomplished a large number of buyers and sellers is required. Eccles (1985) found that very few transfer pricing systems actually make use of any form of exchange autonomy. The two most common alternatives, mandated cost-based and mandated market-based, are using “prices” for the purpose of hierarchical co-ordination. The prices are set according to some administrative rule and hence do not reflect the specific distributed knowledge. Furthermore, hierarchy can always override the use of any price mechanism inside the firm (Baker, Gibbons, and Murphy, 1999). Thus, the use of the price mechanism within organisations is often hierarchy in disguise. A related problem with the idea of internal markets is that by modelling firms with market mechanisms, the essence of the firm may be lost. Kogut and Zander (1992) for example, see firms as vehicles for 7

coordination, learning and identity.. Ghoshal, Bartlett, and Moran (1999) make a similar observation as they describe the downfall of two large US organisations. At Norton and Westinghouse, managers thought of their companies in market terms: they bought and sold businesses, created internal markets whenever they could, and dealt with their people with market rules. Through the power of sharp, market-like incentives, they got what they wanted. People began to behave as they would in a market - acting alone as independent agents with an atomistic concern only for their self-interest.

The evolutionary framework does not lead us down this false track of treating firms as second best markets. Nor does it require us to use the price mechanism in the core explanatory apparatus. Instead it helps us to understand under which conditions intra-organisational competition is beneficial and detrimental to organisational performance.

Evolutionary Theory Evolutionary processes are generally seen as occurring on multiple levels of analysis (Aldrich, 1979; Baum, 1994). Alchian (1950) described economy-wide phenomena, Hannan and Freeman (1977; 1989) studied populations of organisations, and Burgelman (1991), Miner (1990), and Lovas and Ghoshal (2000) described evolutionary processes inside the organisation. Campbell's (1965) seminal paper suggested that the natural selection model offered a powerful means of explaining the different rates of survival and growth of many social activities. Building on evolutionary theory in biology, Campbell identified three basic requirements for the natural selection model to hold; variation, selection, and retention. Variations are the fundamental source of change in social systems. Selection operates on the variations generated and is responsible for removing certain less-fit variations. The remaining variations will therefore be fitter in terms of the selection criteria used. Retention acts to preserve the variations which have been selected. Our theory of intra-organisational competition is built on this model, and more specifically follows from a number of recent studies of intra-organisational evolution (Burgelman, 1991; Lovas and Ghoshal, 2000). However, it is important to bear in mind that when we talk about variation and selection, it applies specifically to cases where the activities in question are duplicate or overlapping. In the following two sections, we provide a detailed discussion of the concepts of variation and selection, and for each we develop hypotheses around the establishment and termination, respectively, of intra-organisational competition. Retention, the third part of Campbell's (1965) model, is in the current paper taken to be the inverse of variation.

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Variation Campbell (1965) argued that the randomness requirement was an unnecessarily strong assumption for an evolutionary model to be valid. He proposed that variations must be blind, i.e. their ability to increase fitness should not be known beforehand. Campbell (1974:422) included thought-experiments and even unconscious processes in his definition of variation. He further argued that multiple variations must be generated and that some of them will have to fail. Campbell's view of variation needs to be qualified in three ways in the context of intraorganisational competition. First, there is some risk when dealing with internal variations that they are not entirely blind or independent. The agents of variation, for example two managers pursuing parallel development projects, might possess insight into the probability of success of the variations generated. And they might have co-operated before undertaking their own projects. As a result, the variations themselves would not strictly be blind or independent, which ceteris paribus would decrease the overall level of variation.

Second, two sources of information- planned, which is deliberate and established by authority, and emergent, which is spontaneous and arises from interacting groups of elements. An example of the former process is Cyert and March’s (1963) problemistic search, which Nelson and Winter (1982:18) compared to biological mutations. An example of the latter process is Burgelman’s (1983, 1991) description of autonomous initiatives taking place at Intel. In the theory developed in this paper we assume that blind as well as intentional variations are generated inside the organisation. The environment does not cause variation, nor does it force particular organisations to search. A correct path might exist, as a result of environmental conditions, but the organisation does not have to choose to follow this path.

Third, the quality and quantity of variation is also important. Given that variation inside the organisation is not entirely blind or random, it is important to consider the alternative "strategies" that an organisation can consider in allowing or even encouraging variation. One approach is to allow a single variation in response to a given environmental threat or opportunity (e.g. a new product to serve an emerging customer segment). An alternative approach is to allow multiple variations and essentially to pit them against each other (e.g. three or four competing products to serve this emerging segment). These alternatives will on average have lower fitness value, but the variance of the average fitness value will be higher. So if the objective is to increase the overall level of variation, it may be that multiple competing variations is a better approach. This argument is analogous to the distinction 9

between K-strategies and r-strategies in biological evolution (Hannan and Freeman, 1977; MacArthur and Levins, 1964). The r-strategy involves the production of a large number of offspring, of which only a small proportion will survive. The K-strategy involves the production of a small number of offspring, and a much heavier investment in nurturing each one. The implication, then, is that the organisation can potentially adopt two different approaches to variation - an r-strategy with a large number of variations and an expectation that most will not survive, and a K-strategy with few variations (often just one) but a higher average fitness. Obviously the traditional model in organisations is closer to the K-strategy, but our argument in this paper is that there may well be conditions under which an r-strategy is superior. Indeed, the key insight here is to show that a trade-off has to be made between the number of variations (K-strategy) and the quality of each variation (r-strategy). The reason for this is that increasing the quality of a given alternative requires teamwork and cooperation, but the very act of co-operation will both reduce the number of possible variations, and will ensure that they are not independent of one another.

Selection This is the mechanism by which intra-organisational competition is terminated. For example in a case of parallel development, a manager might select one activity and kill off the others.. Evolutionary theory frames this process as analogous to natural selection, in which certain organisms are selected by the external (ecological) environment because they have certain characteristics that enable them to survive and grow. Again, however, the analogy is far from perfect. Two issues are worth highlighting, the selection mechanism and the criteria used for selection.

Selection mechanisms. In simple terms the selection mechanism for intra-organisational competition can either be external or internal to the organisation. External selection typically refers to the product market, e.g. in the case where GO competes on certain airline routes with British Airways. Internal selection refers to decision review committees, individual managers or other operational units who make their own judgement as to which of several competing activities should be selected. However it is worth exploring this distinction in more detail, because it helps to shed light on the distinction made earlier between parallel development and coexistence.

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Selection in the product market essentially means that the agent of selection is the end customer. However this is a highly indeterminate form of selection, because customers do not make product selections as a homogenous mass. Rather, there are multiple segments of customers and their demands vary over time, so it often takes several years before the fitness of a given product is clearly understood. And even if a product is selected against (i.e. it sells poorly) it may be retained for other reasons. So unlike in more traditional population ecology framing where less fit organizations disappear through bankruptcy, there is no such acid test in the product market. The market sends strong signals to management about relative fitness, but ultimately they decide whether to kill a particular product. This helps to explain why we see so many cases of coexistence between overlapping products or services.

Selection inside the organization can take two different forms - selection by a hierarchically superior organizational unit or selection by a sister unit. An example of the former is a product shoot-out between two development teams, the winner being chosen by the manager or sponsoring unit that requested the shoot-out in the first place. An example of the latter is a product division in Hewlett-Packard trying to sell its new product to the sales organization (Peters and Waterman, 1982). Both divisions are equally placed in the hierarchy, but it is the sales organization that ultimately selects for or against the product. While these are very different scenarios, they share an important feature, namely that the agent of selection is essentially substituting for the marketplace. Both the manager in charge of the product shootout and the sales organization of HP are trying to anticipate how the product market would react when faced with the competing alternatives. The term vicarious is often used to refer to such selection mechanisms (Campbell, 1969). Vicarious mechanisms are not necessarily inferior to true market mechanisms because they have the advantage that they can act very rapidly. However, they often suffer from lack of detailed market knowledge and from systematic biases (Campbell, 1994; Meyer, 1994).

Criteria for Selection. A related issue is the criteria by which selection occurs. When selection occurs in the external marketplace it will ultimately be based on efficiency but when selection occurs inside the organisation (i.e. through vicarious mechanisms) there are two likely criteria -efficiency and legitimacy (cf. Meyer and Rowan, 1977; Parsons, 1956). Efficiency is based on relative performance within a group of competing ecological units. Legitimacy operates through isomorphism, which is the process whereby one unit of a population resembles other units (DiMaggio and Powell, 1983). The efficiency criterion 11

selects for units with high performance; the legitimacy criterion selects for units with modal performance. This has enormous implications for the process of intra-organisational competition, because the outcome of the process depends critically on the criteria used in selection. For example, if legitimacy ends up becoming the dominant criterion for selection, innovative variations will quickly be selected against, and ultimately variation itself will be suppressed.

PROPOSITION DEVELOPMENT The development of an evolutionary approach to the study of intra-organisational competition provides us with many insights into how it works. We are now in a position to establish formal propositions regarding what we see as the factors driving the establishment and termination of intra-organisational competition. Simply stated, we see the establishment of intra-organisational competition as occurring through the process of variation, and we see its termination as occurring through the process of selection. This is a rather stylised view of the world, because as some of the examples noted earlier suggest, the phenomenon is extremely complex. But as a first step in theory building we argue that it is sufficient. In figure 2 we present our model, based around three key independent variables - environmental uncertainty, marginal cost of duplication, and decentralised decision making.

Environmental Establishment of

+

Uncertainty

Intra-organisational

-

-

Marginal Cost of

Competition

+

Duplication Termination of

+ Decentralisation of

-

Intra-organisational Competition

Decision-Making

Figure 2. Model of Intra-organisational competition

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Environmental Uncertainty. Our argument here is straightforward, namely that a higher level of environmental uncertainty is likely to lead to greater levels of establishment of intraorganisational competition and lower levels of termination. But a more nuanced argument can also be made, namely that the planned and emergent forms of intra-organisational competition will transpire under rather different circumstances. A distinction needs to be made first between the related concepts of uncertainty and equivocality. As described by Daft and Lengel (1986) “Uncertainty is a measure of the organisation’s ignorance of a value for a variable in the space, equivocality is a measure of the organisation’s ignorance of whether a variable exists in the space”2. Uncertainty, we suggest, is what drives the emergence of planned variation. While the managers of the organisation cannot be confident about how uncertainties will resolve themselves, they can make judgements on where additional resources should be invested. And one useful mechanism for doing this is to deliberately plan for competing internal variations. For example Microsoft in the early days of the graphicaluser-interface did not know which operating system would become successful. Their solution was to set up separate units for Windows, DOS, OS/2, as well as Unix through an alliance. This approach can be seen as a way of increasing the information processing capacity of the organisation (Galbraith, 1973). Proposition 1a. Increase in environmental uncertainty will increase the likelihood of planned establishment of intra-organisational competition. Emergent variation, in contrast, is proposed to arise through equivocality. It is often argued that more firms are facing equivocality, which Daft and Lengel (1986) further describe as "multiple and conflicting interpretations about an organisation's situation". In these situations it cannot be expected that managers will have the foresight to deliberately allow competing variations to coexist. However, we can expect different groups or individuals in the organisation to have their own points of view on how a technology or market will evolve. And to the extent that these individuals have the resources and opportunities to do so, they would be expected to respond to opportunities they perceive. Thus, our expectation is that equivocality in the environment will result in higher levels of emergent variations. Proposition 1b. Increase in environmental equivocality will increase the likelihood of emergent establishment of intra-organisational competition.

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Knight (1921) employs a similar distinction between risk (our uncertainty) and uncertainty (our equivocality).

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With regard to the termination of intra-organisational competition, we expect the relationship with environmental uncertainty to be negative. The reasoning here is that while uncertainty (or equivocality) remains in the environment, it would be premature of the organisation to judge which of the competing activities to select. The expectation, of course, is that at some point the level of environmental uncertainty surrounding a given activity will decrease to such a level that a decision can be made, and the termination of intra-organisational competition will occur. However, in reality it is often the case that other factors, notably the marginal cost of duplication, become critical to the decision, as will be discussed below. Under the ceteris paribus condition then, the following proposition is set forth. Proposition 2. Increase in environmental uncertainty/equivocality will decrease the likelihood of the termination of intra-organisational competition.

Marginal Cost of Duplication. Marginal cost of duplication refers to the cost that the organisation has to bear in running two or more activities in parallel over and above the cost of running a single activity. If the competing activities are scrapped (e.g. as in a product shoot-out) then this is approximately equal to the cost of the scrapped activities. But in the case where competing activities are brought to market (e.g. as in GO and British Airways) the marginal cost of duplication is much harder to evaluate because the competing activities have both costs and revenues. Theoretically, the marginal cost of duplication in such a case is the difference in cost between the competing-channels approach and a single-channel approach, but this number can only be guessed at, and it may indeed be negative (i.e. the company benefits from having competing channels to market). Notwithstanding such cases, the basic argument here is that organisations attempt to make efficient use of their resources, and this typically means restricting the level of duplication of activities. While environmental uncertainty increases the potential benefits of intra-organisational competition, these benefits have to be weighed up against the costs to the organisation in allowing duplication. All else being equal then, we would expect the marginal cost of duplication to have a negative impact on the establishment of intra-organisational competition and a positive impact on its termination.

It is important to be clear that we see the main effect of the marginal cost of duplication acting on termination. The reasoning is that the marginal cost of duplication will typically be small in the early stages of an episode of intra-organisational competition, and will rise over time. For example, in the pharmaceutical industry the early stages of drug discovery are relatively 14

cheap, but the cost of putting a drug into the development pipeline is extremely high. In such a case, the benefits of intra-organisational competition in the discovery stage far outweigh the costs, but the reverse is true in development. As a result, pharmaceutical companies typically terminate parallel projects at the point where costs are about to rise, i.e. at the start of the development pipeline.

Second, in terms of the termination of intra-organisational competition, the marginal cost of duplication will have a far greater impact on the use of vicarious selection mechanisms than on the use of product-market selection. The reasoning here stems from earlier point that duplicate activities inside the firm only have costs, whereas duplicate activities in the marketplace have costs and revenues. While it is not unheard of for a company to launch a product that they know is weak as a means of recouping some of the costs of its investment, it is more likely that the product in question will be terminated while it is still under development. These arguments suggest the following two propositions. Proposition 3. Increase in the marginal cost of duplication will decrease the likelihood of the planned establishment of intra-organisational competition. It will have no effect on the emergent establishment of intra-organisational competition. Proposition 4. Increase in the marginal cost of duplication will increase the likelihood of the termination of intra-organisational competition, primarily through vicarious selection mechanisms.

Decentralisation of decision making. This refers to the extent to which lower-level units in the organisation (e.g. business units, subsidiaries) are free to make decisions without interference from the centre. Decentralisation is a key parameter in organisational control (e.g. Burns and Stalker, 1961; Van de Ven, Delbecq, and Koenig, 1976; Mintzberg, 1979; Baliga and Jaeger, 1984). One common approach to control is to argue that individual operating units can be controlled through three mechanisms - decisions can be referred back to the centre (centralisation), decisions can be routinised through formal procedures and plans (formalisation) or decision making can be delegated to trusted individuals who will always act in the interests of the organisation as a whole (socialisation). Viewed in this way, decentralisation assumes that some combination of formalisation and socialisation will be used to ensure that decisions are made in accordance with the wishes of the centre (Baliga and Jaeger, 1984; Edstrom and Galbraith, 1978; Ghoshal and Nohria, 1991).

The extent to which decision making is decentralised is of great importance to the study of 15

intra-organisational competition. If we consider establishment first, decentralisation increases the capacity of individual units to act on their own initiative and to pursue opportunities as they arise. It is therefore likely that some of them will end up working on parallel or overlapping activities. In terms of the planned establishment of intra-organisational competition, we do not anticipate that these control systems will have any significant impact. Our reasoning is that top managers in the company are free to establish planned intraorganisational competition regardless of the systems used to control the rest of the organisation. Proposition 5. Decentralisation of decision making will increase the likelihood of the emergent establishment of intra-organisational competition. It will have no effect on the planned establishment of intra-organisational competition.

With regard to the termination of intra-organisational competition, the basic argument is that the more decentralised decision making is, the greater the degrees of freedom afforded to individual units to pursue their own activities regardless of whether they are in the wider interests of the organisation as whole. All else being equal, then, decentralised decision making will reduce the likelihood of intra-organisational competition being terminated. To be clear, the purpose of this proposition is not to suggest that decentralised organisations are anarchic. Rather, it is to argue that top management face a tougher challenge in terminating cases of intra-organisation competition than those who operate in more centralised organisations. One further point should be made on termination, namely that the criteria used for selection are likely to vary depending on the level of decentralisation. The more centralised the decision making in the organisation, the more power is likely to be held by a small number of individuals. In such circumstances, the process of decision making is more likely to be driven by the experiences and biases of this dominant coalition ((March and Simon, 1963; Prahalad and Bettis, 1982) rather than by the demands of the market. We would therefore expect selection decisions to be more legitimacy-based than efficiency based (see the earlier discussion). By contrast, decentralised decision making allows individuals closer to the market to make their own judgements. While there will always be prevailing industry recipes or mental models that bias an individual's decision making, our expectation is that selection decisions would be more efficiency-based than those made under more centralised conditions. Proposition 6a. Decentralisation of decision making will decrease the likelihood of termination of intra-organisational competition. Proposition 6b. The more decentralised decision making, the more termination decisions will be based on efficiency rather than legitimacy criteria. 16

Other factors. Other factors, including the values of the dominant coalition, the size of the organisation, and the nature of competition in the industry are also likely to be important. However, in the interests structuring this little-understood phenomenon our preference is to start with a limited number of factors that we have theoretical and anecdotal support for. As research progresses it will be possible to build a more complete model.

DISCUSSION AND CONCLUSIONS Burgelman (1991), Galunic and Eisenhardt (1996), and Lovas and Ghoshal (2000) have presented case-study based research in which the internal dynamics of the organisation are explored using an evolutionary framework. While the current paper is built clearly on this research tradition, it represents an important departure in two ways. First, it looks specifically at cases of overlapping internal variations, rather than at internal variations that are typically pursuing different opportunities (while admittedly competing for internal resources such as financing and people). Second, the paper puts forward a model identifying the conditions under which intra-organisational competition is likely to be observed. Further research is needed to validate and extend the model. In this section we provide a few observations about the possible directions that future research in this area could take.

One issue relates to how competition affects the agents of variation. Among other effects it is likely that the amount of conflict will be increased. Researchers have found conflict to be functional in some situations (e.g. Eisenhardt and Bourgeois, 1988) and dysfunctional in other situations (e.g. Pfeffer and Sutton, 1999). Our macro-level model needs to be complemented with research on the effect of competition on the agents of variation. The effect of conflict could possibly be dysfunctional for the agent of variation themselves, but functional for the organisation as a whole. Agent of variation could refer to individuals as well as organisational units or projects. Of particular relevance is a more complete understanding of conflict as a tool in organisational design.

On a related note, it is important to understand how deep intra-organisational competition penetrates the organisation. As previously described, there has to be some degree of modularity in the organisation for intra-organisational competition to be viable. When this is the case, the dominant coalition of the organisation to must determine if the modules should be duplicated. At one extreme end, each organisational member can be treated as a modular 17

unit. A proponent of this view is James Halpin, CEO of CompUSA. We want competition among the workers. 'Your coworkers are your competition' is what I tell people when they ask how to get ahead. I tell employees to ask themselves at the end of each day: 'What did I do today to put myself above my coworkers?' If you can't come up with anything, you wasted a day. Because those who get promoted and move ahead are the ones that shine. We've got a big employee population, and we're going to remember the ones doing outstanding work and the ones doing poor work (Halpin quoted in Puffer, 1999).

At the other extreme, the whole organisation is treated as one module. As a preliminary hypothesis, we would expect that the negative effects of competition are much larger when the idea is taken down to the level of individual organisational members. Smaller negative effects are posited when organisational units are responsible for the variation and when competition is seen as a mechanism to resolve a temporary environmental exigency not a permanent state of affairs.

A second research issue is what we can call "dynamic learning mechanisms". A key advantage of intra-organisation competition is the transfer of learning that can take place after dissolution. In contrast to biological evolution, agents of variation, whose output is not selected are still able to transfer their routines. Organisational members can learn both from the transfer of successful routines as well as from the elimination of unsuccessful routines. The amount of learning taking place depends on the amount of conflict generated. For example Pfeffer and Sutton (1999) describe how the distinctly different cultures between the GM plants and the Saturn plants have made knowledge transfers very difficult. And Wheelwright and Clark (1992) argue that internal competition in product development should be encouraged up to the first of two screening process.

The last issue relates to what has been described as tapered integration. A portion of required intermediary goods is produced in-house and the remainder is outsourced to independent organisations (Scherer and Ross, 1990). Our model explicitly requires at least two units of variation inside the organisation. This means that most support services are excluded from our model since they are normally not duplicated inside the organisation. Our model could be extended to include competition between internally generated variation and variations available in the external market. This seems to be a more and more common situation for commercial organisations. One example is Ford’s Premier Automotive Group, the division in charge of Jaguar, Lincoln, Aston-Martin, and Volvo. They plan to let internal design centres produce five or six rival prototypes for new models. In the future they furthermore plan to invite external design organisations to compete (Financial Times, 2000). 18

To conclude, in this paper we have argued that organisations may use the power of the competitive forces inside the organisation. These forces are powerful, so they have to be unleashed with care – otherwise they will destroy more than they create. There is a general tendency to consider the ideal organisational structure as stable over time. A particular structure is often retrospectively considered a failure if it is replaced a few years later. We believe that different organisational structures can serve different purposes. When the environment is changing, different structures become optimal at different points in time. In many cases, we believe, intra-organisational competition is such a temporary organisational structure. The temporary character should not influence its adoption, nor should its dissolution be discredited.

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