BUSINESS INNOVATION BETWEEN GLOBALIZATION AND SOCIAL DIFFERENTIATION
Dr. Carl Henning Reschke, Institute for Management Research Cologne, Germany
[email protected] Dr. Sascha Kraus, University of Oldenburg, Germany
[email protected] Dr. Rainer Harms, University of Klagenfurt, Austria
[email protected] Dr. Matthias Fink*, Vienna University of Economics and Business Administration, Austria
[email protected] Work in Progress Comments Welcome! Corresponding author: Carl Henning Reschke
ABSTRACT In this paper, we argue that a trade off between homogenization and differentiation in social and cultural systems can be linked to systemic theories of evolutionary change. We briefly introduce the necessary perspectives from biological evolution, sociology and social psychology, innovation and globalization with respect to management issues. Subsequently, we discuss the implications for management and derive suggestions for strategic management of international businesses in the area of cultural systems and innovation. We argue that managers need to consider the trade-off between homogenization aiming at the realization of economies of scale and scope and differentiation and varied needs for integration by different sets of customers. As a result, we sketch a framework of thought that increases their ability to steer their companies through global social change. Keywords: globalization, homogenization, differentiation, trade-off, systemic evolution, innovation, management
Electronic copy available at: http://ssrn.com/abstract=1584264
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INTRODUCTION On the one hand, economies of scale and scope favour globalization of business activities. On the other hand, resistance to what is seen as cultural domination by the western world and large companies increases (Castells 1996-98, Kingsnorth 2003). It seems that the two ‘forces’ of economic globalization (‘homogenization’) and cultural independence (differentiation’) are irreconcilable at first sight. Paraphrasing Adam Smith (1776), the reach of economic forces towards globalization is only limited by the extent of the market. This gives rise to a question of judgement, where to limit the reach of the market, which ultimately depends on value judgements. Accordingly, Smith had also put emphasis on the importance of moral values in his ‘Theory of Moral Sentiments’ (Smith 1759). Similarly, List (1841), arguing against Ricardo, and Veblen (1899) emphasized the role of cultural differences in economic theory and practice. This tension between market, society and values is re-entering the political and strategic management scene with the downfall of economic barriers after the end of the ‘cold war’ and economic opportunities due to new technologies. Globalization is the process of dismantling of barriers to trade, deregulation and privatization of formerly ‘nationalized’ firms and markets. At the same time, demographic changes unfold as a result of the increasing world population and life expectancy with wide ranging effects on society and industry, e.g. in the pharmaceutical, health care or insurance industry. The complexity of the market environment due to technological change and cultural differences, aggravated by a high speed of change, requires enterprises to be prepared to use new possibilities and deal with badly calculable risks. Enterprises are often facing ‘hyper competition’ (D’Aveni 1994) that pressures them into one-dimensional strategies focusing on cost-efficiency and homogenization of organizational procedures and products. The questions whether enterprise strategy is directed towards the right goals and whether it is in alignment with its environment is not often asked under such pressure. As long as the economy is seen as carrying a primary role relative to morale, and as long as the forces of the market are interpreted as fait accompli (Ulrich 1997), this further increases pressure on management towards a cost efficiency focus and homogenization of products and activities. However, this strategy is likely to clash with demands for cultural identification and responsiveness in ‘local’ environments, and offers little advantages of differentiation, thus resulting in decisions suboptimal for society and businesses. We argue in the following how these contrasting tendencies can be explained on the basis of a systemic evolutionary view and sociology, which suggests that these perspectives also offer handles for remedying the situation.
EVOLUTION BETWEEN STABILITY AND CHANGE Systemic Evolution * Matthias Fink is sponsored by the APART [Austrian Programme for Advanced Research and Technology] scholarship granted by the Austrian Academy of Sciences.
Electronic copy available at: http://ssrn.com/abstract=1584264
The contrasting tendencies for individual and social differentiation and integration can be explained on the basis of different theories of human and social systems’ characteristics which, among other approaches, may be traced to human’s evolutionary heritage (e.g. Miller 2001). The tension of differentiation versus homogenization and maintenance of social order or integration thus seems to be a driving force at the basis of our life-world. Systemic evolutionary theory offers a possibility to explain the balance between these forces. The distinctive focus of the systemic evolutionary school are selection processes internal to an organism, the constraining and directing force of existing structures (Riedl 1975), and the functional interaction of (organic) systems and their parts for the evolution of adaptations. It is argued that morphological and hierarchical constraints in the organization of information govern the evolution of biological systems. The emergence of stable ‘species’ requires a balance between traditional structures and variation. At times these constraints are broken, which leads to a realm of opportunity for exploration and (relatively) rapid change (Gould and Eldredge 1977; Crutchfield 2001). Systemic evolutionary theory is closely connected to an epistemological view of evolution (Riedl 2000). Mutations are like hypotheses that are tested in the biological environment. Successful selection of variants leads to the build up of knowledge about the life-world of a species. From this perspective, selection provides ‘feedback’ effects from ‘the environment’ on the medium that carries information over successive generations. These feedback effects are obvious in social systems but are usually rejected in standard evolutionary biology (the so called Neo-Darwinian Synthesis). It should be noted, however, that systemic evolutionary theory does not argue for a Lamarckian theory of evolution, but for a feedback effect on the level of the population via successfully selected structures. These are built up cumulatively and influence the direction of evolutionary processes. Systemic evolutionary theory therefore does not reject the standard NeoDarwinian Synthesis, but rather claims this theory needs to be extended (Riedl 1975). In our view, evolution should not be conceived of as competitive process alone, rather it is a dynamic strategy of learning by exploration and adaptation, which often involves cooperation. The choice of strategy influences success to a large degree. A strategy of cooperation promises often more success, since it opens up additional behavioral opportunities (Fink 2005), and problems can be solved by cooperation, which allows for feedback between events that enable the collective success of all participants (Hinz 1994). Social Systems Taking a larger perspective, one can argue that also social processes show evolutionary characteristics as described by systemic evolutionary theory. Analogous arguments can be made based on psychological gestalt theory and cognitive perspectives for social and economic systems (Schlicht 1997; Reschke 2005). This view also links into Kurt Lewin’s (1951) concept of organizational change, which is based on the interplay of social force fields. The balance of forces determines the stability or change of social systems.
Cultural and social systems themselves are usually subject to a tension between integration and disintegration. Thus, the tension between economic ‘global homogenization’ and ‘cultural differentiation’ reflects a fundamental tension at the basis of both, small social systems such as business organizations and large societies. This tension has accompanied the historical emergence of modern societies. A number of theoretical systems have been developed in sociology to deal with aspects of the question by e.g. Simmel, Parsons, and lately Luhmann. Simmel (1890) described the need for individual differentiation as a process of competitive differentiation driving people into different combinations of social circles through which they can define their individuality. This allowed respectively limited common understanding between different groups of actors in these circles by their degree of overlap. Parsons (1937) developed an argument about the evolution of functional differentiation of social subsystems, which leads to a stable, functionally differentiated social structure. Luhmann (1990, 1995), based on biologists Maturana and Varela, has adapted the concept of autopoiesis to social systems. Society is seen as a mechanism to structure reality and reduce complexity encountered in daily life by humans. Breakdown of understanding and communication leads to differentiation of societal subgroups. In fulfilling these functions, social systems increasingly close up in adapting to specific (perceived) environmental conditions and become self-referential. Thus, the development of societies, local organizational units, and global businesses all require balancing forces between homogenization and differentiation. Homogenization leads to stability and, in the extreme, inertia while differentiation leads to change and loss of coherence and integration in social systems. Between these two ‘forces’ social stability and change unfold, which suggests that patterns of organizational change (e.g. Meyer, Gaba, Colwell 2004) can be explained on the basis of their interaction and the mechanisms causing them postulated by systemic evolutionary biology and sociology. This kind of pattern has been used in relatively simple models of social change by Kurt Lewin. There organizational change processes are subject to a field of forces leading from a frozen state to unfreezing and refreezing (e.g. Lewin 1951). Other, more complex models (e.g. Gersick 1991) frame change processes using topological mathematics such as Thom’s catastrophe theory. Gersick places organizational change processes in the context of punctuated equilibria, an idea developed by Gould and Eldredge (1977) to describe the patterns of stability and change in the paleoontologic record. This suggests: the management of the trade-off between integration and variety (e.g. internally with respect to innovation or externally with respect to cultural responsiveness) can be informed by an evolutionary account of how social systems unfold.
APPLICATION TO ORGANIZATIONS AND MANAGEMENT Innovation Enterprise development is usually shaped by phases of stability in which the enterprise changes incrementally, and phases of transition where fundamental change often takes place (Miller and Friesen, 1980). Enterprises must continuously generate new competitive advantages and carry
out permanent transformations to prevent falling behind in competition. They must develop a deep understanding of the dynamic generation and maintenance of competitive advantages. The trade-off between organizational homogeneity and variety, stability and change has been identified as a trade-off between exploitation and exploration (Smith and Tushman 2005, Cohen and Levinthal 1989/90) in innovation studies. At the foundation of this trade-off seem to lay dynamics of opportunities and constraints similar to those described by systemic evolutionary theory. According to Schumpeter (1934), the entrepreneur’s role lies in the combination of ideas, technologies, services, people, and knowledge, to form a workable product and organization selling it. Entrepreneurs foster innovation as new combinations of (sometimes new) elements that lead to the “competitive elimination of the old” (Schumpeter 1934, 66-67). Entrepreneurs perceive opportunities, combine ideas, resources, and production factors into new products and entrepreneurial ventures that, if successful, lead to innovations and the creative destruction of established enterprises and industries. Thus, the entrepreneur breaks up existing economic systems, allowing for change and together with managerial actors develops new configurations of economic structures and actions. This entrepreneurial process of change is intertwined with the process of globalization. GLOBALIZATION AND MANAGEMENT Globalization Globalization increases the flow of ideas, services and products, by breaking down psychological, cultural, and regulatory / institutional barriers to trade and business activities, increasing opportunities for business based on technological and social change.global and regional interaction as well as integration. However, those that stand to loose their traditional way of earning a (more or less) decent life and status without the opportunity to profit from the fruits of technological progress and global change will naturally be opposed to such changes. Economic theory would suggest that winners buy loosers off. This assumes there are enough proceeds to satisfy both winners and loosers, and neglects social barriers to change. Business activities and institutional structures tend to be connected to value systems, norms and cultural symbols that form a tightly integrated system. This is true as much for organizations and societies. Therefore, change in such systems is a political process of organizing, balancing and interests as much as a process of psychological changes affecting ones conception of meaning in and of life, associated value systems and societal institutions. Furthermore, demographic changes unfold as a result of the increase of the world population and life expectancy with wide ranging effects on society and industry, e.g. in the pharmaceutical, health care or insurance industry (Krüger 2000). Globalizing markets and reduction of market entry barriers lead to intensified competition. This results in chances, risks and a paradox: Enterprises are not able to adapt to markets corresponding to the transformation of society by increases in efficiency alone. New situations require novel approaches, and thus highly
aggregated level of strategic thinking, which forms a core element of the enterprise strategy (Berndt 1998). However, only by constant improvement of operational effectiveness, can enterprises reach and maintain profitability. Furthermore, enterprises are challenged not only by direct competitors, but increasingly also by related industries, which may enter and offer substitutes (Allen 1999). The forces of change are seen in acceleration of communication, a tendency towards immateriality and networks, a higher fluidity of organizational boundaries, and an increasing autonomy of action in actors and enterprises (Schreyögg 2000). These changes raise the importance of innovation and the ability to innovate. The specific selection in markets and society determines which inventions will prevail. Selection, therefore, is a key concept for institutional and cultural change (Burns and Dietz 1998). This requires better and more efficient forms of cooperation and control (Laszlo 1992) or trust-based self commitment (Fink 2005). The characteristics of change are for instance (Krüger 2000): -
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Diversity: nationally as much as regionally, enterprises are exposed to different environments and target groups, which create contradicting influences. Volatility: Enterprises are confronted with a high degree of volatility, due to shorter product cycles, technology life, regulation life spans and changes in supply and demand structures. Permanence: Change always accompanies the enterprise. Globalization constantly causes new changes and conditions, reaching equilibrium seems unlikely in the future. On the one hand, changed strategies can be observed in the enterprises (e.g. the concentration on core competencies and outsourcing), on the other hand changes and deand reconstruction of value chains occurs via market influences, letting new industries develop.
Management Implications Enterprises are internally dynamic, networked systems, which are integrated into a large number of complex environments containing complicated feedback effects. Amongst others, they interact with customers, investors, retailers, interest and political groups in society, regulation and tax authorities, government, potential cooperation partners and competitors. Despite their degree of complication, enterprises show patterns of order and follow certain rules of conduct (Steinbrecher 1990). Thus, the increasing dynamics of business requires thinking in the interrelations in and between complex systems considering their constraints and opportunities for change. This requires a sound knowledge of the historical development of organizational and social structures. These structures are successively layered expressions of historical decisions under economic constraints and (historical) actors’ views that may be hidden today but are likely still ingrained into these social systems. Changing these structures affects traditions that need to be considered and may exist for more or other reasons than an organizational efficiency view suggests. Therefore, as Malik (1993) argues, evolutionary thinking is always thinking in systemic contexts. This is also
true for strategic management (Stacey 1993). Strategic leadership depends on managing a dynamically changing network of influences. The task of strategic leaders is to create dynamic equilibrium between the enterprise and its environment (Zacharias 1998). The principles of evolution and self-organization in natural systems can be applied to innovations and dealing with complexity and uncertainty (Kirsch 1997). Management needs to be situatively adapted with complexity. This means to reduce complexity when situations and requirements are principally known and to increase complexity in situations of uncertainty and change, such as the development of new products and processes. A reduction of rules and creation of spaces of freedom – i.e. by the development of norm-based trust (Fink 2005) – in networks fosters innovation. A creative environment can be build by reducing inflexible hierarchies and striving for power as well as measures fostering open communication, openness to experimental approaches, and measures for conflict management (Steinbrecher 1990). Management is thus not so much oriented at optimization, but at balancing, integrating and synthesizing different factors. Continuous development of the organization can be controlled via conditions and rules, needs to be reflected upon, and needs to be adapted to the requirements of a changing situation (Malik 1993). The complexity of the market as well as the speed of the change requires enterprises to be always prepared to use new possibilities and deal with badly calculable risks (Berndt 1998). Enterprises are often facing “hyper competition” (D'Aveni 1994), sometimes in order to attain strategic superiority by means of disruptive change (D'Aveni 1999). This hyper competition can be described as accelerating competition over price, quality, market position, and perception. A key to successful change is the readiness for transformation, which includes an open attitude and behavior towards the chosen measures and goals (Krüger 2000). Developments internal and external to markets form the background for the change in strategies. Knowledge and abilities are increasingly strategic resources in the industrial nations, but have often been shed thoughtlessly in favor of short-term advantages during re-organization.
CONCLUSION We have argued that a theory of economic processes informed by systemic evolutionary concepts may be able to better deal with the tension between homogenization and diversity than concepts from neoclassical economics alone. Systemic evolutionary theory argues that there must be a sufficient degree of variability of biological (sub)systems to ensure evolutionary change and that there must be sufficient traditionalizing forces in order to prevent drifting apart of a species' characteristics, which resembles theory and observations in organizational (Lewin 1951, Gersick 1991) and innovation studies (Smith and Tushman 2005, Cohen and Levinthal 1990) and sociology (Simmel 1890, Parsons 1937, Luhmann 1990, 1995). Thus, this theory can be used to inform strategy making. Obviously the story sketched here has limitations: The framework presented needs to be developed further and has to be tested empirically in its application to organizations. This
requires research into the historical formation of constraints and opportunities for change in organizations. This research can be informed by systemic evolutionary biology and sociological theories on the evolution of modern society. For this, Daft and Weick’s (1984) view of organizations as information processing entities offers a useful starting point, particularly when combined with an evolutionary epistemological view (Riedl 2000, Lorenz 1973). The outcome of this information processing can be connected to Mintzberg’s view of strategy as emergent resultant between actors’ intentions and environmental influences (Mintzberg 1994) and co-evolutionary perspectives on organizational and industrial change (Volberda and Lewin 2003). Complexity and uncertainty lead to imitation in economic actors, which results in similar strategies and actions (Alchian 1950). This suggests to search for similar patterns and processes in the evolution of economic entities, e.g. industries (see e.g. McGahan 2000; D'Aveni 1999; Kraus/Reschke 2004). The research and particularly the results flowing from a systemic evolutionary view may thus be employed in politics and management. The realization that linear models do not carry as far as we expected them to may be surprising. New are the internal and external ‘contents’ of change, the resulting developments and the intensity and speed of required change. This correlates with a decrease in certainty about the direction of change and the right choices. Much of what was real, machine-like, determined and objective became unpredictable, indefinable and subjective in the middle of the last century (Arthur 1999). If seen systemically, the conditions for economic actors in a changing environment are doubly uncertain as trends in the environment cannot be identified and inabilities to calculate and predict developments increase. The knowledge required for identifying the best alternative is beyond the possibilities of actors (Hayek 1945; Beckenbach 2002). Dealing with uncertainty, complexity and the search for novelty are becoming increasingly important. Positioning advice and value chain analysis (Porter 1980; Porter 1985), re-engineering (Hammer and Champy 1993) and ‘learning’ perspectives (Hamel and Prahalad 1994) may be a short-term help to managers facing new competitors, new technologies, and cost pressures, but do not convey information on where to go and how to get there in dynamic, uncertain environments that nevertheless seem to follow historic patterns. A possible key to a reduction of the back-braking combination of increasing uncertainty and complexity of modern business life might be to unmask some of the core behavioral norms (which are commonly accepted to be practical constraints) as constraints of thinking. Behavior that would be perceived non-rational under the economic maxim can be beneficial in a holistic view after all: It has been shown in the context of highly uncertain and complex cooperation relationships (double contingency), that intrinsically motivated self-restriction to non-defective behavior, can open up essential behavioral options to business actors (Fink 2005). Managers engaged in strategic planning have to understand that sometimes it is necessary to take a step back in order to have a run in the future.
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