Complexity Theory, Market Dynamism, and the Strategy of Simple Rules

This study explores the fundamental tension between too little and too much structure. Observed in multiple streams of research, this tension is associated with the tradeoff between efficiency and flexibility that is central in dynamic markets. Using the strengths of simulation to confirm internal validity and to elaborate theory through virtual experiments, we examine the relationship between the amount of structure and performance in dynamic environments. We have several findings. First, we confirm that an inverted Ushaped relationship exists between performance and the amount of structure. Yet, this relationship is unexpectedly asymmetric – i.e., it is better to err on the side of too much than too little structure. Second, we describe how market dynamism moderates the relationship between structure and performance. In particular, increasing unpredictability is associated with a less structured optimum. Moreover, when environments are very unpredictable, there is a very narrow range of optimal structure and a precarious “edge of chaos.” But when environments are very predictable, there is a broad range of optimal structures and equifinality. Third, other environmental dimensions have their own unique effects – i.e., increasing velocity raises performance while increasing complexity lowers it. Surprisingly, increasing ambiguity diminishes the value of skill. Broadly, we contribute to strategy by confirming the internal validity of strategy as simple rules, and clarify the boundary conditions of positioning and opportunity strategic logics. We contribute to organizational theory by providing an optimistic view of adaptation with clarity regarding its challenges for new v. established firms. Overall, we sketch an emerging theory for how organizations adapt that builds on the insights of complexity science.