- The document discusses how corporate culture and innovation are analogous to DNA and evolution in living organisms. It argues that companies must adapt and change to survive, just as organisms must evolve to survive changing environments. - It also discusses how companies can promote innovation through establishing separate "Type B" organizations that have more freedom to take risks and focus on new opportunities, similar to how biological mutations occur and are tested. Successful innovations can then be absorbed back into the main organization. - Examples are given of companies that have launched spin-offs to promote innovation, along with reasons why spin-offs don't happen more often, such as misaligned executive incentives and reluctance to give up control. Overall the document draws parallels between biological evolution

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In one of his famous quotes on natural selection, Charles Darwin once said: “In the struggle for survival, the fittest win
out at the expense of their rivals because they succeed in adapting themselves best to their environment.” Interestingly,
this statement holds equally true for biology as for business; companies that fail to change and adapt to a changing
environment will eventually be forced to exit the market due technology shifts. History is replete with such examples, for
instance when horse carriages were replaced by automobiles, fixed-line phones by mobiles, typewriters by PCs, and so
forth. Put simply, in a business setting, innovation is the process through which firms evolve, hopefully for the better.
Insights
Innovation and Evolution
- Dr. Martin Lockstrom

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The Corporate DNA
In living organisms, genes in the form of DNA form the“source code”
which dictates how cells should divide and develop; starting as stem
cells, some develop to become muscle cells whereas others develop
into brain cells, and so on. What science shows is that DNA also
constantly changes over time, in a process called mutation. Some
of these changes go unnoticed, whereas others make a noticeable
adverse or beneficial impact on the organism.Those belonging to the
last category help the organism improve its chances of survival and
thereby pass on this beneficial trait to future generations.
In a business setting, the corporate DNA is nothing but the corporate
culture of values, beliefs and subjective norms permeating the
organization. Instead of genes, there are memes (a generic
information fragment), a term introduced by well-known British
evolutionary biologist Richard Dawkins. Memes are not designed,
but can only be observed and classified retrospectively through the
mere process of long-term survival – memes simply survive because
they contribute to the effectiveness of the organization.
Corporatecultureisthesourceofintention(suchasstrategy),whichin
turn dictates business decisions.This fundamental principle is known
as the theory of reasoned action, developed in academic circles in the
1970s. As we all know, although DNA mutations happen sporadically
andspontaneouslyallthetime,theprocessisratherslowandveryfew
turn out to be beneficent to the organism.This is also the reason why
it’s incredibly hard to alter corporate culture – to make a comparison,
it even dwarfs a global SAP roll-out! Add the intangible nature of
corporate culture as another complicating factor, and it’s easy to
understand why many firms don’t even bother trying to change it,
leading to stagnation and decline as a best-case result.
Why Companies Exist
Like living organisms, companies exist because it helps them
accomplish things that they would not have been able to accomplish
otherwise.SoifcultureisthecorporateDNA,whatistheverypurpose
of doing business at all? From an evolutionary, biological perspective,
the answer would probably be“survival”or“in order for genes (or in a
business context, memes) to replicate”. Interestingly, the two are not
mutually exclusive, but actually go hand in hand; the basic survival
mechanism of a species is replication. In other words, species try to
survive not by placing a single bet on the survival of an individual
organism, but by hedging their bets on a large number of differently
configured organisms.
Whereas species try to survive through replication and constant
adaptation of constituent organisms, the ultimate goal (explicit or
implicit) of any firm is to maximize profit, regardless of other goals
such as shareholder value, sustainability etc., which at the end of the
dayareallsubordinate.Thenotionofprofitmaximizationaccordingto
classical economics omits one of the core tenets of evolution, namely
reproduction. If reproduction is one of the fundamental processes
of evolution, why is it so uncommon in a business context? Have
managers missed something?

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Resolving the Innovator’s Dilemma
Harvard professor Clayton Christensen founded the term“innovator’s dilemma”to denote the phenomenon where companies do everything
right but still fail.Why? Because as companies grow larger and become more and more successful, managers tend to stick to practices that made
them successful in the past, without considering whether they might continue to do so in the future.
On a day-to-day basis, companies are facing even more dilemmas, most importantly the struggle between creativity and efficiency: On the one
hand, companies have to ensure quality and low cost through standardization and stable business processes. On the other hand, companies
also have to ensure future revenue streams, which can only come into existence through innovation and creative thought processes. Alas, the
two do not always go well together (see Table 1).
Table 1. Corporate dilemmas
Build on past vs. Learn from past & realign
Deliberate strategy vs. Emerging strategy
Hands-on leadership vs. Direction only leadership
Build on strengths vs. Search out new opportunities
Differentiate for high value added vs. Beat competition on costs
Diversify vs. Focus
Size for critical mass vs. Small & entrepreneurial
Profit for shareholders vs. Consensus outcome for many stakeholders
Mass market vs. Niche market
Global vs. Local
Culture of stability vs. Culture of chaos through innovation
Centralised for control vs. Decentralised for flexibility
Relying on logic & following vs. Being creative & pioneering
Revolutionary change vs. Incremental change

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Furthermore, disruptive technologies, which may seem irrelevant
and non-threatening in the early stages are often neglected as they
catertonewmarketsegmentsthatcannotbeanalyzedeasily.Inmany
cases,therootcauseofthisorganizationalrigidityiscorporateculture.
Most innovation experts agree that in order to succeed with anything
beyond incremental innovation, a new unit within the existing
organization has to be set up and eventually spun off. The idea
is to create a unit (Type B organization) which can operate more
independentlyandavoidtheconstraintsthatoftenhinderinnovation
from taking place in traditional organizations (Type A organization)
(see Figure 1). In other words, the Type A organization serves as an
incubator forType B organizations, that are later spun off as separate
entities.Overtime,thesespin-offswillthemselveseventuallyturninto
Type A organizations as they mature.
Figure 1. The Type A organization as incubator for innovation
Thereasonsforthisaremanifold.Firstly,inordertonurtureinnovation
andcreativityingeneral,theremustbeahightoleranceforambiguity
and an acceptance of the fact that the organization would have
to operate without clear rules; many innovations are generated
randomly, so without random activities, there can be no innovation.
Secondly, the traditional approach to investment is to set specific
objectives and develop a single path – in order to enable innovation,
processes have to be iterativeand multiple alternative innovation
paths must be pursued. Finally, and most importantly, those who
are driving innovation must be allowed to fail (preferably fast), and
take risks. Table 2 shows a comparison of traditional vs. innovative
organizational characteristics.
Table 2. Traditional versus innovative organizations
TypeA(Traditional)Organization TypeB(Innovative)Organization
Operates within mental
framework based on clear and
accepted set of rules of the
game
No clear rules – these emerge
over time
High tolerance for ambiguity
Strategies path dependent Path independent, emergent,
probe and learn
Clear selection environment Fuzzy, emergent selection
environment
Selection and resource
allocation linked to clear
trajectories and criteria for fit
Risk taking, multiple parallel
bets, tolerance of (fast) failure
Operating routines refined and
stable
Operating patterns emergent
and‘fuzzy’
Strong ties and knowledge
flows along clear channels
Weak ties and peripheral vision
important
Degree of instability
Degreeofuncertainity
Type A
Type B
Traditional Organization
Innovative
Organization

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Making it all Happen
Going back to our earlier context of evolutionary biology, the
approach makes perfect sense, as it helps companies to“reproduce”
through new entities which can grow and adapt to a changing
environment. What’s more, the clear legal boundaries between
the parent and the spun-off entity also allow the latter to operate
more freely, while reducing legal and financial risk to the former. If
the spin-off fails, the effects will not propagate. Finally, the parent
company can provide managerial capacity, industry and government
relationships, and assistance with administrative activities, which
frees up the capacity of the subsidiary’s management to concentrate
on products and markets. An overview of some notable examples
is shown in Table 3. The reasons for these spin-offs vary, but the
least common denominator is to obtain more strategic leeway for
exploiting innovation and to provide more transparency to investors
and shareholders.
Table 3. Spin-off examples
Parent Organization Spin-off Year
Eli Lilly Guidant 1994
Hewlett-Packard Agilent Technology 1999
Encana Corporation Cenvous Energy 2009
Dryships Inc. Ocean Rig UDW 2011
Oxford University Oxford Nanolabs 2005
IBM Shugart Associates 1973
Shockley Transistor Fairchild
Semiconductor
1957
Time Warner AOL 2009
Dreamworks
Studios
Dreamworks
Animation
2004
In a business context, spin-offs happen relatively seldom. Why is
this the case? The reason is three-fold. Firstly, incentives of senior
managers are often misaligned with the enablers of innovation.
Executives are usually rewarded by considering KPIs like revenue,
revenue growth, profitability and return on assets. Therefore, any
undertaking that may jeopardize these metrics is usually not actively
promoted.Secondly,astheaverageCEOtenureis8.4years,according
to data from The Conference Board, executives will unlikely support
investments with a longer pay-back period and let someone else
harvest the fruits. Finally, for personal reasons, decision makers have
a tendency to avoid giving up management control which might
occur in the case of spin-offs.

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Summary and Conclusion
Businessesbearmuchresemblancetolivingorganismsfromanevolutionary,biologicalperspective.
Alas, all too often, innovation in companies is hampered by misaligned incentive systems or
inadequate organizational design, which don’t encourage creative thinking. As we have seen from
the discussion, evolutionary biological can provide us with many valuable insights and analogies
that can help us better understand the meaning of concepts such as corporate DNA, and ways to
promote longevity despite the pressure to think short-term. By taking a broader view of innovation
and realizing that the key enabler at the end of the day is corporate culture, we also realize that
any process, system or employee is only as good as the corporate culture allows. Changing and
improving corporate culture is one of the hardest undertakings one can pursue.

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About the Author
Dr. Martin Lockstrom
Principal Consultant, Building Tomorrow’s Enterprise, Infosys Labs
Martin is a specialist in Supply Chain and Operations Strategy,
Outsourcing/Offshoring and International Management. During a
six-year stint in China, he established the research and education
activities at the SCM, Sustainability and Automotive academic
centers at China Europe International Business School, Shanghai.
He established the first endowed chair for Purchasing and SCM in China at Tongji
University, Shanghai, and was also responsible for setting up Supply Chain Management
Institute China, an international network of SCM research and education hubs.
Martinco-foundedProcurisSolutions,anITcompanyspecializinginSCM-relatedsolutions,
offering consulting services to companies like Accenture, Ariba, BMW, Clariant, Dell, Dow,
Ernst & Young and Intel, among others.
He has a Ph.D. in Supply Chain Management from European Business School, Germany, a
bachelor’sandmaster’sdegreeinIndustrialEngineeringandManagement,fromChalmers
University of Technology, Sweden. He speaks Swedish, English, German and Chinese,
has published over 50 articles and papers and presented at more than 60 conferences.

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