Innovation and path dependence

One of the sessions I went to at the European Organisation Design Forum conference, on Saturday, was led by Elise Kissling. She ’s described in the conference info as ‘passionate about creating learning teams and organisations that deliver radical innovation’.  At the point she wrote this she was at chemical company BASF.  Five weeks ago, she left to start up SkyNative to execute an innovative method of bringing daylight into rooms that don’t have windows.

The session was was still about BASF but less about the program and learning platform program she designed and launched ‘for market driven innovation’ and more about the difficulties of getting innovations adopted and into the mainstream of the organisation.  She spoke bluntly and bravely on this.  She began with the definition that she likes of innovation which comes from the Cambridge Dictionary  Innovation:  a new idea or method, or the use of new ideas and methods.   It was getting the innovations into use that caused her, finally, to move on and have a go herself with SkyNative

BASF barriers to innovation implementation that she mentioned were:  inability to find the leader(s) who would decide to implement or take on the innovation, sudden strategy changes,  turf wars (‘don’t touch my EBIT’), ‘this idea is too far from the business’, ‘these are just little ideas that don’t fit together’, ‘implementation is too complex’.

Kissling noted that these types of barriers contributed to a high failure rate in their innovation work.   Her statement is echoed in an HBR article, the authors say ‘To catalyze innovation, companies have invested billions in internal venture capital, incubators, accelerators, and field trips to Silicon Valley. Yet according to a McKinsey survey, 94% of executives are dissatisfied with their firms’ innovation performance.’   (Unfortunately, there is no link to the quoted McKinsey survey, and I can’t find the survey that has it.  Does anyone have the link?)

Listening to the talk,  the concept of path dependence crossed my mind.  It’s a concept that I don’t think we give enough thought to in organisation design work, and especially when we use words like ‘transformation’, or ‘agile’.

In An Essay on The Existence and Causes of Path Dependence (2005), the author, Scott E Page, discusses it.  He tells us that, ‘Path dependence in its loosest sense means that current and future states, actions, or decisions depend upon the path of previous states, actions, or decisions’.   He then explains (in mathematical detail) ‘within a dynamical systems framework’,  what this means ‘using two broad classes of models.

He says, ‘I base the first on dynamical systems and the second on choice theory. These models help to reveal the causes of path dependence. The proximate cause of history mattering differs in the two classes of models. In the first, history has force. The past exerts sway over the present. A decision to prohibit women from voting effects how women see themselves in relation to men. When, given the vote, women cannot escape all effects of their past denial of rights. In the second, the cause is more direct. A decision to provide social security for the aged lowers the economic and political costs to extending those benefits to orphans and the infirm. When written in the dark lead of mathematics, the line between forces and externalities appears crisp, but that is not so. Cognitive attachments are externalities in our heads, …  and externalities between choices change the incentives for making subsequent choices. Changes in incentives can be equivalent to changes in force.’

I interpret this, from an organisation design perspective, to mean that older organisations are only able to transform, or innovate as far as their history allows.  McKinsey make a telling point, that seems to support this notion, ‘It’s no secret: innovation is difficult for well-established companies. By and large, they are better executors than innovators, and most succeed less through game-changing creativity than by optimizing their existing businesses’.

In a later paper  (2016) that considers path dependency and game theory Scott E Page argues ‘that institutional performance is path dependent, and that patterns of behavior—culture—drive this path dependence.’ It’s a dense, mathematical paper, drawing on game theory.  One of the classes of games he discusses is ‘Coordination Games: In coordination games individuals choose one of two actions: to follow tradition or to innovate’.  In these games, highest payoffs are achieved when players manage to play the same action as their opponent. These games can capture technological choice as well as coordination on social norms or language, or situations in which societies fail to adopt an innovation for cultural reasons, such as the United States continued use of the English system of weights and measures.’

As Kissling was speaking, I looked up BASF to find out when it was established – April 1865.  So, a lot of history!  (You can see annual reports from then to now here), assuming the theory around path dependency is applicable to organisations – and it looks that way to me – it may be at least a partial explanation of why innovation appears to be difficult in BASF as well as in other well-established organisations.  They are governed/constrained, among other things, by their past choices and decisions.

If this is the case, are large organisations never going to truly transform or innovate?   It depends.  Authors, Sydow, Schreyogg, and Koch, of another paper Organizational Path Dependence: Opening The Black Box, explains organisational path dependence as a process that (1) is triggered by a critical event leading to a critical juncture; (2) is governed by a regime of positive, self-reinforcing feedback constituting a specific pattern of social practices, which gains more and more predominance against alternatives; and (3) leads, at least potentially, into an organizational lock-in, understood as a corridor of limited scope of action that is strategically inefficient.

Kissling’s method of breaking out of BASF’s organisational lock-in has been to leave, and attempt innovation in a new (start-up) organisation.  But is there a way that BASF’s path could be changed? The framework of path dependence, offered by Sydow, Schreyogg, and Koch, ’offers insights into the possibilities and limitations of breaking out of organizational path dependence. In particular, path breaking requires a thorough understanding of the social mechanisms driving the path process. Understanding these mechanisms, in turn, provides a platform for developing path-breaking interventions.’

Haier, established 1984, is a good example of an organisation that has used path-breaking interventions to stay innovative.  The company is one of two – the other is Cemex – analysed in the book Energy and Innovation: Structural Change, which notes that ‘the concept of path dependency is critical when analyzing the rise of innovative organizations in emerging economies, as most of them are locked-in at stages that lack innovation capabilities’.  Haier and Cemex are ‘two companies in emerging economies that broke out from this path dependency to create strong innovation capabilities, catching up with global leaders in their industries’.

From what I heard about BASF – it is showing little sign of breaking out of path dependency.  I wish Kissling well in her new venture, and recommend – if she hasn’t already – that she investigate path dependency to avoid lock-in as she designs her new organisation.

Do you think learning about path dependency would be useful for organisation designers?  Let me know.