Janne M. Korhonen Aalto University School of Economics, Helsinki, Finland janne.m.korhonen@aalto.

fi Sub-theme 34: Discovering Creativity In Necessity

Is shock treatment good for you? Complexity of strategy, competitive intensity and crisis length as factors in strategic resilience and innovation

Part of the data set underpinning this paper has been reused from a paper presented at the PREBEM 2011 conference in Rotterdam and at Organization Science Winter Conference 2012 pre-conference event in Steamboat Springs, Colorado. A preliminary version of this paper has been accepted for presentation at the DRUID 2012 conference in Copenhagen.

Abstract The dualistic nature of crises as both problems and opportunities has engaged researchers for a long time. Several researchers have informally suggested that crisis events can serve as opportunities for strategic innovation and change, but empirical studies in the subject have been difficult to arrange and may suffer from survivorship and other biases. In particular, we lack insights into what kinds of strategies are more resilient to crises than others. As an alternative to empirical studies, I develop a rigorous model that parametrizes the four key aspects of strategic complexity and crises: the complexity of strategy itself, as represented by interactions between elements of strategy, the extent to which a crisis affects the organizations strategy, the length of the crisis and the competitive intensity within the industry. The results suggest that crises are largely a neutral force in strategic innovation, being almost equally likely to result to bad outcomes. Furthermore, the complexity of strategy and competitive intensity have a much stronger effect on the outcomes than other aspects. This suggests that researchers should pay more attention into complexity and competitive situation in their research design.

Introduction "[O]nly a crisis - actual or perceived - produces real change. (Friedman 1962:xi) The dualistic nature of crises as both difficulties and opportunities has not escaped thinkers modern or ancient, as the anecdotes ranging from double meaning of Chinese character for "crisis" to voluminous "change is good" literature suggest. It is clear that some crises are opportunities to get rid of the old and adopt the new, as e.g. Vlikangas (2010) and Rochet et al. (2008) suggest; it is equally clear that other crises may be mortal challenges that the organization simply must overcome, or else. Accordingly, organizational scholars and strategists have had a lively interest in developing organizational forms and strategies that would be resilient to crises and shock events that is, organizational forms that could continue to function in face of adversity. Furthermore, a burst of recent research suggests that innovations - defined here as the implementation of ideas, procedures and structures that are novel to the organization, e.g. Amabile et al. (1996) - can be facilitated by sudden, unanticipated constraints that force firms to rethink their traditional assumptions (Gibbert and Scranton 2009, Goldenberg et al. 2001, Hoegl et al. 2008, Moreau and Dahl 2005, Popp et al. 2011, Vlikangas and Gibbert 2005, Weiss et al. 2011, Faulkner and Vikulov 2001, Meyer 1982, Prideaux et al. 2003). The conclusions of these studies broadly agree that discontinuities that force firms to unexpectedly change its accustomed working practices (e.g. unpredictable events, tightening regulation, pollution limits, or resource shortages) may facilitate innovation in some but not all conditions. One theoretically feasible mechanism by which crises might be beneficial is implicit in the concept of fitness landscapes (Wright 1931, Kauffman 1993). If there is more than one solution to a particular problem for example, organizational design and the search for solutions is myopic (that is, it cannot consider all the possible alternatives), it is likely that the search will be stuck on a local peak or optimum in the landscape, even though there may be higher optima still to be find. If the search involves costs or risks as e.g. strategy experiments will inevitably do and the existing solution is adequate, the organizations have a disincentive for further search. In these situations, a crisis can serve as a required spur that forces the organizations to search more than they would otherwise do, hence improving the odds that a better solution will be found. This dynamic is sometimes called the breaking of lock-in or path dependency, although strictly speaking path dependency as defined by Arthur

(1989) or David (2001) refers to models where decisions whether to adopt a particular course of action are influenced by decisions made by other agents, not by myopia of search. A slightly different proposal has been put forward by those researchers who see constraints and crises as focusing devices (Bradshaw 1992, Frenken 2006) that help individuals and organizations focus their attention and cognitive resources to overcome bottlenecks (Rosenberg 1976) or reverse salients (Hughes 1983) that would otherwise hold up the developmental processes. According to this view, constraints force otherwise complacent firms to rethink traditional practices and adopt new ways of working (Gibbert and Scranton 2009, Hoegl et al. 2008, Katila and Shane 2005, Mone et al. 1998, Nonaka and Kenney 1991, Vlikangas and Gibbert 2005, Weiss et al. 2011). In support of this view, research on environmental innovation has noted that regulatory constraints are the key drivers of innovation in many industries (Popp et al. 2011), and literature on tourism management has found that crises may lead to positive outcomes as well (Faulkner and Vikulov 2001, Meyer 1982, Prideaux et al. 2003). These findings suggest that crises may sometimes be beneficial, if the end result is an organizational or technical innovation or improvement that would otherwise have not been made. However, the research findings are far from conclusive, and the implicit assumption generally remains that crises need to be avoided, if at all possible. The diverging views have caused commentators to explain that innovations can happen both because or despite of constraints (Gibbert and Scranton 2009, Weiss et al. 2011). In sum, the existing research has broadly confirmed the ancient Chinese wisdom: crises can be both opportunities and problems. However, assessing whether crises are problems or opportunities on average has proven to be a difficult exercise. In particular, concluding that shocks and constraints have a beneficial role depends on the assumption that the inventions they engender would not have been made otherwise, an assumption that is obviously difficult to test with real-world data. Furthermore, several aspects of organizational design-resiliency interaction remain unknown. For example, a persuasive argument has been made that complexity of an organizations strategy deters imitation by competitors and thus enables it to maintain productivity and profitability advantages (Rivkin 2000, Weick 1976). On the other hand, profit maximizing behavior and highly complex strategies, usually with many interdependencies and tight coupling between organizational parts and strategic decisions, are usually seen to be vulnerable in a rapidly changing environment (DAveni and MacMillan 1990, Levinthal

1997, Vlikangas 2010). In fact, Levinthal (1997), using a similar model to one used in this paper, already concluded that more complex organizations (and, presumably, more complex strategies) are less able to respond effectively to changes in the environment, such as crises. Unfortunately, Levinthals landmark paper considered only adaptation after permanent changes in the environment, and assumed that the competitive pressure - a fundamental variable that is known to differ between industries and over time - was constant. As such, it is uncertain whether or how short-term disruptions of status quo and variable competitive pressures would affect the results. Similarly, while Siggelkow and Rivkin (2005) concluded that successful adaptation in turbulent environments required a balance of speedy improvement and diverse search, they did not address the competitive intensity and its possible effects. In sum, the research gap Im interested in addressing is in the interplay and effects of four causal factors: 1) complexity of an organization or its strategy (these are largely interchangeable for the purposes of this analysis, as the organization can be considered to be a manifestation of its emergent although not necessarily its intended - strategy), 2) competitive intensity within the industry and its close substitutes, and 3) length and 4) depth of the crisis confronting the organization. I believe these four factors have an effect on the likelihood whether an organization is likely to be harmed by a sudden crisis or find it as a welcome opportunity for strategic renewal and change. In particular, this paper is motivated by the lack of research in three key questions, namely 1. Do constraints and crises, as a rule, cause firms to adopt more efficient strategies than they would otherwise do? 2. How do the crises influence the emergence of novel strategies? 3. Do the features of the crisis (its length or depth) have an effect? The paper is structured as follows: In the following sections, I will first define the abovementioned factors in more detail. The simulation model, a modified NK framework (Kauffman 1993), is then detailed, and results of representative simulation runs presented. Finally, a conclusion and a discussion are provided.

Complexity of strategy and organization In a formal NK model, as used by e.g. Levinthal (1997) and Rivkin (2000), an organizational entity may be characterized as consisting of N attributes, or decisions, that collectively make a contribution to how and how well the firm works. Each individual decision i has several options, and each different combination of N options a string (i1, i2, iN) is assumed to lead to a different performance of the organization. This represents the reality that a firms strategy is embodied in this multidimensional nexus of choices (Rivkin 2000). Following Rivkins reasoning, the organization and its strategy can be considered as interchangeable for the purposes of this paper: organizations performance is not determined by the strategy that is deliberated, but by the strategy that actually has emerged (Mintzberg and Waters 1985). In other words, in this context what counts is what the organization is, not what it ought to be. However, the complexity of strategy is not just a function of the number of decisions or attributes. What is even more important is the degree of interdependence between these decisions. When this degree is low, the strategy is not complex: decisions can be optimized independently of each other, and hard trade-offs are usually rare. There will be a single optimum configuration (or at most, a few) for the organizations strategy. On the other hand, when decisions are highly interdependent, meaning that the impact of each decision depends not just on the decision itself but also from other decisions, trade-offs are inevitable. There will be multiple optima, possibly with only slight performance differences. Thus, both the number of decisions, N, and the degree to which the decisions interact with each other determines the complexity of strategy. This formulation is in line with conceptualizations of complexity commonly used in organizational research (Zander and Kogut 1995, MacMillan et al. 1985, Simon 1962). This second aspect of complexity, the degree of interdependence, is typically abstracted as a parameter K. Formally, the impact of each decision i is influenced by i and K other decisions, with K ranging from 0 to N 1. As K increases, each decision i becomes much harder, as the number of other decisions it affects increases. At the same time, the number of local peaks in the performance landscape increases, from the minimum of 1 when K = 0.

Competitive intensity within an industry The (emergent) strategy of the organization is here assumed to have a direct effect on its performance. Thus, better strategies (i.e. those that are more fit to the environment) lead to better performance. I remain agnostic as to whether this performance refers to e.g. performance or cost of organizations products, its profitability, its capability to intimidate customers into buying its product, or some other possible performance measure for the goods that the organization is producing; for the purposes of this paper, it suffices to think of an abstract and absolute variable performance that is determined by the organizations strategy. I also readily admit that this performance value does not always capture all the important information about an organizations real performance; indeed, for the reasons detailed below, it is even necessary that it will not do so. In any case, the reader should feel free to interpret this abstract quantity as something concrete say, the speed of delivery service offered by the organization. Whatever the concrete meaning of the performance value, I assume here that it is the single most important determinant in any competition between different organizational strategies. However, the intensity of competition may vary. It is universally understood that in some situations, competing organizations have more latitude to produce different goods without being outcompeted from the marketplace, whereas in others, a monopoly of single organization or strategy will result. The competitive intensity is introduced to the model as an abstract variable, ranging from 0 to 1. The variable simply states how much of the competition is determined by the performance variable: if the competitive intensity is 0.95, any strategy offering less than 95% performance relative to average performance of all the strategies in the marketplace will not survive, and is replaced with another. The residual is thought to represent all other variables that may determine success in the competition, such as product differentiation, proximity to buyers, or just plain luck. (For this reason, it is not thought that the performance variable necessarily explains everything about the goods.) It is easy to see that with this model, a competitive intensity of 1 means that the goods are completely undifferentiated and the end result is a monopoly, whereas lower competitive intensities will mean increasing differentiation and diversity. The practical result is an approximation of quantity (Cournot) competition model in economics, but the model is more parsimonious.

As is usual in these types of simulations (see e.g. Levinthal 1997, Rivkin 2000, Lenox et al. 2006), the relative size of the marketplace is assumed to be stable. The initial strategies start with equal market shares; if a strategys performance is below threshold level set by competitive intensity variable and the average performance at the point of time, it dies off and is replaced either by a randomly drawn new strategy (representing new entrants) or by a copy of a better-performing strategy (either has typically a 50/50 chance of occurring). The odds of any single strategy being copied in this manner are directly proportional to its performance, so that better-performing strategies will eventually capture a larger share of the marketplace. It should also be noted that the scale benefits are not explicitly modeled in this paper, and therefore larger market share does not as such give any advantage. The competitive intensity can also be interpreted as a measure of diversity within the marketplace.

Crisis and its length and depth Pearson and Clair (1998) defined crisis as "a low-probability, high-impact event that threatens the viability of the organization and is characterized by ambiguity of cause, effect, and means of resolution, as well as a belief that decisions must be made swiftly" (1998:60). Accordingly, the crises considered in this paper are unexpected events that may have high impacts on the performance of the organizations strategies. As the specific causes of the crises lie beyond the scope of this paper, they are treated as exogenous events that the organizations must simply cope with. In practice, the simulations introduce crises as sudden changes in the availability of options: for a specific time period (the length of the crisis), a specific number of decisions (the depth of the crisis) are forcibly altered in every strategy within the simulation so that the now-constrained option is no longer allowed. After the crisis has passed, the options are made available again, and the organizations are free to choose them if they so desire. In less abstract terms, the conceptualization can be thought to represent situations where an organization must change its strategies in order to survive. For example, a sudden difficulty in obtaining critical raw materials or change in regulations might require the organization to change its strategy or cease operations.

The ambiguity of effect and means of resolution arise naturally from the way in which the organizations strategies are modeled. The only thing that is certain to the simulated organizations is that a change has occurred; what is the proper direction to take is unknown. It is important to note that it is possible for some strategies to be unaffected by the crisis, if they do not depend on constrained options: this would seem a natural way of modeling the effects of diversity when coping with sudden change. The length of the crisis is not specified in any absolute units of time. Rather, to make a more generalizable simulation, I have assumed that the basic time unit in the model is the decisionimplementation cycle of the organization, i.e. the shortest time in which the organization can make actual changes in its strategy. The length of the crisis is therefore a multiple of the length of the decision cycle. The absolute shortest length of the crisis itself may be arbitrarily small: it is theoretically conceivable, for example, that an unexpected 15-minute delay in a crucial point of a supply chain will cause a strategic realignment of a major company (however unlikely the contingency may be). What matter are whether the crisis is of sufficient severity to initiate strategic realignment, and how long the constraint on strategic options lasts.

Simulation model The dualistic nature of crises as both problems and opportunities introduces a potential source for survivorship and selection biases. Generally speaking, management research has been preoccupied with the determinants of success. Unsuccessful adaptation to crises may lead to the dissolution of the organization, preventing it from appearing in any future study. Furthermore, as unsuccessful strategies and organizations are often forgotten (either on purpose or due to lack of interest), material about success stories tends to be easier to gather. To eliminate the potential for selection and survivorship biases, instead of empirical research, I have turned to computer models of strategic innovation. As mentioned in the Introduction, the model is based on NK fitness landscapes, originally introduced by Anderson (1983) and later famously used by Kauffman (1993) in mathematical biology. The NK model has been previously used in important work in strategy and organizational literature (e.g. Levinthal 1997, Levinthal and Warglien 1999). In particular, this paper follows the example of Rivkin (2000) in modeling strategy with the NK model. Due to reasons of space, the following will

only summarize the basic features used in these simulations; an interested reader is referred to e.g. Rivkin (2000) for a more detailed treatment of the model. In order to study the effects of disruptions due to constraints in as simple model as possible, I consider a simple organization whose ways of working or strategy can be codified as 16 binary (0/1) decisions. This simplification retains the essential features of the strategic choice, while resulting to a more tractable model. Therefore, the model represents a possibility space where individual organizations search for the best possible strategy among 216 = 65 536 possible alternatives. In practice, the organizations (100 in each simulation, although the results were tested and found to be broadly robust to changes in the number of organizations) start with randomly drawn 16-bit strategies. The search then proceeds by the organizations varying one decision at each time step. The organizations look at the alternatives that are one step away from their current position, and then select the first alternative that increases the strategys performance, if there are any. I also tested the so-called greedy search heuristic, where the organizations would consider all the alternatives and select the one promising the highest increase in performance, but the results were robust to this change. This local search is the simplest search heuristic that captures the idea that organizations cannot know in advance which combinations of decisions would eventually provide the best overall performance. It also neatly captures the part of Pearson and Clair's (1998) definition of crisis as an event where decisions must be made swiftly, often without the possibility of considering all the alternatives. Because this local search stops once there is no more room for improvement, it is prone to get trapped into local maxima when the complexity is high. This represents the effects of lock-in and the difficulties organizations have in radically altering their strategies due to financial and psychological reasons. As detailed in the above section on competitive intensity, the search is guided also by the overall competitive situation. If a particular strategys performance is less than average performance of all strategies times competitive intensity, it can be either replaced with a better-performing strategy, representing a change in market share in favor of better strategy, or by a new entrant with a radically new strategy, a random 16-bit string. In the simulations tested below, the new entrants did not materially change the outcomes even when there was a 50/50 chance of whether a particular bad strategy was replaced with an existing strategy or with a new entrant. Therefore, most simulations were run without the possibility for new

entrants. The likelihood of any particular strategy gaining market share is proportional to its performance. The crisis is introduced as follows: after the organizations have had time to reach their stable states, a variable number of decisions i are forced to be altered to option 1. Strategies that have already chosen this option are unaffected; the others will experience a reduced performance. The crisis lasts for a variable number of time steps (1 end of simulation), after which the option can again be chosen. Usually, the constraint introduced by the crisis causes the organizations to start searching for a new strategy. This search proceeds as detailed above. Particularly in simulations with high competitive intensity, a typical response is that the strategy (or strategies) that had relatively high performance but were unaffected (or were affected less) by the crisis capture significant market share.

Simulation mechanics The simulation was build by extending a freely available Sendero NK model (Padget et al. 2009). I completed multiple series of simulation sequences with varying parameters for competitive intensity, new entrant introduction, length and depth of the crisis, and complexity K of the strategy. Each simulation sequence contains 50 individual simulation runs for each K = 015. The initial conditions are determined randomly for each run. The constraint is introduced at turn 15, when all 100 firms have already found their local maxima. The simulation is terminated after turn 30. The time for finding new maxima after the crisis only rarely exceeded 5 turns. The main parameters altered between simulation series are represented in Table 1. I also explored the simulations robustness to various parameter changes and possible hidden nonlinearities. In total, I conducted 94 simulation series of 800 individual simulations each. The results are broadly robust, and the simulations behave in a linear fashion to changes in most parameters (i.e. the results when competitive intensity is 0.85 are roughly between the results from competitive intensities of 0.75 and 1).

Table 1. Simulation parameters. Simulation series 1. Competitive intensity* Competitive intensity 0-1, 0.05 (increment) New entrants Crisis depth Crisis length increments No 1 5 2. New entrants 0-1, 0.25 incr. Yes 1 5 3. Crisis length* 0-1, 0.25 incr. No 1 1-end 4. Crisis depth 0-1, 0.25 incr. No 1, 4, 8, 16 5

* = Indicates simulation series which were tested also with greedy search dynamics. Results were robust to this change.

Results To answer the questions set out in the introduction, the data from the simulation was analyzed in various ways. Of particular interest were the changes in performance before and after the crisis, measured as average percentage change in performance between time step 14 (just before the crisis) and time step 30 (end of simulation). This is thought to answer the first question posed in the Introduction, namely, whether a crisis would cause organizations to adopt more efficient strategies. The second point of interest was the extent to which the strategies adopted were novel, i.e. did not exist in the simulation prior to the crisis. This was measured by determining the percentage of strategies that were not in use prior to the crisis out from all strategies in the end of the simulation. In general, the results proved to be surprisingly robust to most changes in parameters, including shock depth, new entrants, or particular search dynamics. The key differentiator turned out to be the competitive intensity. For this reason, the figures below show the results of 12 representative simulation series. Each series consists of 800 individual simulation runs, 50 for each value of parameter K. For each series, the parameters for crisis (shock) length and competitive intensity were altered, while depth was kept at 1 (one decision affected). The results are displayed below, starting from changes in performance.

Change in average performance

Figure 1. Performance change, in percentage points, in first six representative simulations. Error bars indicate standard error of the mean (when visible). Dotted line indicates one standard deviation. Horizontal dashed line indicates zero change.

As can be seen from the Figures 1 and 2, the effect of a crisis on average performance of industry depends largely on the competitive intensity and the complexity of the strategy. The clear and significant drop in performance in higher competitive intensities and highercomplexity strategies (panels c and f in Figures 1 and 2) suggests that as a rule, more complex strategies in a more competitive environment fare badly when hit by a crisis. Two factors account for this difference: first, a highly competitive, environment tends to reduce variety in strategies. When a crisis hits, lack of variety means lack of options that could act as platforms for further development. Second, higher competitiveness does not give time for strategies to fully develop. Even a promising path is likely to be abandoned, if it doesnt provide clear and immediate benefits over existing strategies. As a result, breaking the lock-in and developing truly novel alternatives becomes difficult.

The effects of crises on less complex strategies and in less competitive environments are, for the most part, statistically insignificant. This suggests that crises are usually not relevant factors in the development of improved strategies. However, the high variation (as indicated by the dotted line marking one standard deviation) is notable. This means that crises can serve as spurs for strategic innovation although the average results suggest that crises on average do not. The findings are consistent with the dichotomous nature of previous literature on the effects of constraints (e.g. Hoegl et al., 2008; Gibbert et al., 2007; Vlikangas and Gibbert, 2005; Weiss et al., 2011).

Figure 2. Same as above, but with 5-turn and permanent shocks. Perhaps surprisingly, permanent constraints do not lead to marked decrease in performance except when strategies are very simple (and therefore easily optimizable).

The emergence of novel strategies In many simulations, the strategies that were ultimately used to go around the constraints imposed by the crisis were not developed as a response to the crisis: often, at least some simulated organizations had used them even before the constraint was introduced. To determine the extent to which pre-existing strategies were used and the likelihood of novel strategies emerging as a result of constraint breaking the path dependency, I compared the strategies in use before the constraint to strategies being used at the end of the simulation. The results of this comparison are plotted on Figures 3 and 4 below. In nearly all the cases, well over half of the strategies used at the end of the simulation existed before the constraint. As should be expected, if the constraint imposed by the crisis is only temporary and the strategy had been easy to optimize (low complexity), a pre-existing strategy nearly always returns to use. The situation is somewhat different when the constraint is permanent, with the highest shares of pre-existing strategies seen when the strategies are moderately complex (K 24). Interestingly, several observers have noted that many if not most real-life strategies and technologies seem to fall within this range (Frenken 2006) However, in environments where competition is intense, over 80% of strategies may be preexisting. In other words, crises tend to increase the market share of existing strategies more than they provide opportunities for novel strategies (and perhaps organizational forms) to emerge. Again, the high variability (as indicated by spreading standard deviation lines) suggests that in some cases, crises can provide opportunities for novel strategies. A plausible explanation is that developing novel strategy takes time and resources, something an organization working under unexpected constraints may not have. However, a lucky break is possible from time to time. As can be expected, the probability of a novel strategy emerging depends largely upon complexity of the strategy: more complexity means more local peaks in the fitness landscape, meaning that organizations have a higher chance of being stuck in one. As the crisis forces them to search for new alternatives, there is a higher chance (compared to low-complexity settings) for them to find a previously undiscovered combination of decisions that offers a better performance. These findings may help explain the dichotomous nature of previous explorations and suggests that when faced with an unexpected problem, organizations and their customers naturally fall back to previously developed alternatives in preference of developing

completely novel strategies. The previous explorations did not control for the complexity of strategy and may have suffered from e.g. availability bias in their empirical material.

Figure 3. Share of pre-existing strategies at the end of the simulation. Bars indicate standard error of the mean, dotted line one standard deviation.


Figure 4. Same as above, with 5-turn and permanent shocks.

Conclusions In the Introduction, I set out to answer three primary research questions about the effects of crises on strategic innovation. In the following, I will go briefly through each question and its answer.

Do constraints and crises, as a rule, cause forms to adopt more efficient strategies than they would otherwise do? The answer to the first question is negative. For the most part, crises are about equally likely to result to the organizations adopting less efficient strategies than would be the case without the crisis. However, it is possible that crises spur strategic innovation. Nevertheless, it should not be counted upon to happen.

How do the crises influence the emergence of novel strategies? In almost every case, crises open a possibility for novel strategies to emerge. This is most likely when the strategies used are complex, as there may still be unexplored, better alternatives for existing strategies. However, the odds are somewhat against that in most cases. If the strategy is very simple, temporary crisis will not in itself be enough to open up an opportunity for a novel strategy to emerge and compete against already developed strategies. However, the simulations leave open a possibility that a new strategy could arise and manage to capture market share while existing strategies suffer from the crisis-induced constraint. If this market share can be translated to market power e.g. through network effects a new strategy might eventually outcompete the old strategies. This was not modeled in the simulation. Furthermore, it should be noted that the simulations modeled a stable, mature industry, with little radical innovation happening. In a more turbulent environment, where stable, dominant strategies have not yet emerged, a crisis can have far larger consequences. Effectively, a crisis could tip the scales in favor of one strategy against another. However, this depends, again, on the complexity of strategies and the number of local peaks in the fitness landscape: if the strategies can be simple, i.e. with few interconnections between elements, there will be few local peaks and any shock caused by a crisis will at best cause a temporary slowdown in convergence to dominant strategy.

Do the features of the crisis (its length or depth) have an effect? The answer to this third question seems to be surprisingly little. A crisis seems to be long enough to cause major impacts if it is simply long (or important) enough to initiate strategic change at all. The exception to this rule is when the constraint introduced by the crisis is permanent: in those cases, simplest strategies are no longer the least affected by the crisis. Instead, strategies with mediocre complexity (K 24) fare better. The overwhelmingly largest factors determining the effects of crises to strategic innovation seem to be the competitive intensity within the industry and the complexity of strategies. All the other tested factors have, at most, a relatively small effect on the outcome.

Discussion When [a] crisis occurs, the actions that are taken depend on the ideas that are lying around." (Friedman 1962:ix) What these simple simulation models can tell us about the relationship of crises and strategic innovation? First of all, the surprising result is that the length and depth of the crisis seem to have relatively little impact. It is of course obvious that a crisis that affects multiple decision options and lasts longer has a greater impact on the performance of an organization. However, as far as the emergence of improved strategies is concerned, the differences between a very short crisis and a longer one remain very small. It seems to be enough to get the ball rolling, not to keep on pushing it. The implication could be that a crisis-prone environment with many short, sharp crises might be beneficial for strategic innovation. However, the other side of the coin is that the results also suggest that on average, crises are a neutral force. It is nearly as likely that a crisis leads to lock-in in a poorly performing strategy, as that it leads to the breaking of the lock-in and to a better strategy. Obviously, such an interpretation makes especially case studies of strategic innovation somewhat suspect of selection and availability bias. Furthermore, the evolution of the strategy in the simulation is largely determined by the initial conditions, i.e. by the initial strategy. On the face of it, it seems plausible that real organizational strategies are likewise largely determined by the initial strategy of the organization; in other words, strategy has a history, it has inertia, and it cannot be easily changed to something else entirely. If, however, real life mirrors this simulation even approximately, the implication is that much of literature on strategic change simply might not apply. If the organizations capability to change is largely determined by its strategy, and if its strategy is largely determined by its history, the logical conclusion is that change processes and strategic reorganizations that worked in one organization work in another only by accident. It may very well be, for example, that those organizations that turn crises into opportunities do so only because happy accident positioned them in a strategically correct position: that the ability to make lemonade out of lemons depends more on whether you happened to be in a right spot at the right time, not so much on an intrinsic skill or attitude.

Given what recent years have taught us about e.g. how humans tend to attribute success to skill instead of luck, even under controlled laboratory conditions (e.g. Rosenzweig 2007), this raises some troubling questions about management research and the roles that managers, consultants and management scholars are even able to play. The picture of powerlessness thus painted is perhaps unpleasant, even terrifying, but it does not necessarily make it wrong. The second conclusion is that the above quote by Milton Friedman seems to be broadly correct. The crises do not really drive strategic innovation; instead, they tend to drive the adoption of already tried and tested strategies, whether it is by other organizations copying the good strategies or by a single organization increasing its market share. This distinction is subtle, but if proven correct by further studies, important. Although it is beyond the scope of this paper to offer empirical evidence, anecdotes and experience suggest that Friedmans insight would be correct; if so, the competitive intensity and its interplay with search present a plausible mechanism by which a boundedly rational agent, in a world where strategic search carries risks and costs, would end up copying instead of innovating. Thirdly, although the simulations did not explicitly model the emergence or adoption of substitutes, it seems plausible enough that large decreases in average performance could drive customers to accept completely different substitutes or even cease using the goods altogether. If so, the combination of two results performance change and emergence of novel strategies might suggest that complex strategies that depend on the interlinked components and their functioning may indeed be a liability in a turbulent environment. Although this has already been suggested (by e.g. Rivkin 2000, Levinthal 1997, Siggelkow and Rivkin 2005), these simulations add a crucial variable: the role of competitive intensity. Significantly, and in contrast to what previous research has suggested, complex strategies tend to fare as about well as simpler ones when the competitive intensity is low; in fact, if the constraint remains permanent, they fare even better. If a complex strategy therefore brings competitive advantages, as e.g. Rivkin (2000) argues, the pursuit of such a strategy should probably not be stayed simply by the fear of a turbulent environment. Although complex systems may be vulnerable to perturbations due to their complex interdependencies, it is good to remember that one of the most complex systems in the world the human brain is also one of the most resilient and adaptive systems known to science. In light of this anecdote and the simulation data above, it would seem premature to judge complex systems as inherently unstable and generally vulnerable to environmental

turbulence. Further research clarifying just what kinds of complex strategies are vulnerable to disturbances would be welcome. Finally, this papers perhaps the most important implication concerns research design. I have briefly illustrated how complexity and competitive intensity (or diversity of alternatives), two factors that have rarely been controlled for in management research, may have large effects on the results. In fact, these two factors seem to be so important that the results are nearly totally robust to changes in other parameter values. If this holds true for real life, researchers should in the future pay closer attention to these factors when attempting to determine the relative merits of particular strategies or organizational configurations. For example, case studies of strategy should always seek to determine even if tentatively the interconnectedness of the strategys elements, and the competitive intensity or diversity of substitutes should likewise be analyzed. Further research along these lines would shed light to many dilemmas presented in e.g. this paper.

Acknowledgements The author would like to acknowledge Mikito Takada for invaluable assistance in programming the model.

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