Integrating organizational evolution and strategy: Intrafirm evolutionary processes and competitive dynamics

The dissertation addresses the broad question: How can firms change to sustain competitive advantage?. This research encompasses 3 empirical papers which investigate: (1) the processes driving different forms of evolution, (2) the processes underlying dynamic capabilities, (3) the co-evolution of intrafirm variation, selection and retention (VSR) processes, and (4) links between intrafirm evolutionary processes and competitive dynamics. A central debate in organization science revolves around two competing explanations for how change occurs within populations: selection vs. adaptation. The dissertation hypothesizes that adaptive internal VSR processes operate inside firms to create dynamic capabilities. Firms have been observed to adjust the balance between VSR processes to address external selection pressures. Differences in the maintenance of this balance with respect to the competitive environment results in differential firm outcomes. The concept of balanced continuity (BC) introduced suggests that a particular balance among continuous internal VSR processes is necessary for firms to achieve adaptive outcomes. Hypotheses argue that high and low VSR activity severely constrains a firm's ability to achieve competitive advantage. Hypotheses are examined in two contexts: (1) 193 Fortune 1000 firms, and (2) longitudinal study of 432 banks in the Foreign Exchange (FX) Trade Industry (1973-1993). Results (studies 1 & 2) partially support the BC hypothesis and demonstrate that: (1) performance increases with variation, (2) performance varies non-monotonically with internal selection, (3) adaptation and selection are interrelated processes of change, (4) internal natural selection explains two forms of population change: Darwinian and Lamarckian, (5) high and low amounts of knowledge creation and knowledge diffusion processes decrease firm exit, and (6) intrafirm evolutionary processes influence firm outcomes and competitive dynamics. Findings motivate further investigation of the VSR processes underlying balanced continuity. Adopting an inductive approach, study 3 examines VSR behavior of firms with low and high exit activity in the FX Industry (1974 to 1993). Results identify that: (1) balanced continuity is achieved by engaging in more retention than variation, (2) a threshold exists for variation behavior beyond which variation activity is dysfunctional, (3) adaptive outcomes require firms manage the co-evolution of VSR, and (4) a hierarchy of firm capabilities exists.