Managing on Rugged Landscapes

An emergent theme in the study of organizations is the broad differences in managerial practice and performance across firms. We develop an explanation for these phenomena that turns on the complexity of the environments that firms operate in. We construct a model that formally captures the difficulty of the manager’s problem and show how managers search for good managerial practices by combining theoretical knowledge with practical experience, learning as they go. In this setting the evolution of firms is path dependent, marked by numerous failures, successes, and reversals. Nevertheless, patterns emerge. We show in particular how initial differences in performance persist and grow in expectation over time. We then apply the model to several long-standing questions in the study of organizations, exploring how imitation and coordination interact with the difficulty of the manager’s problem and impact the performance of firms. We also apply the model to the growth and development of nations, showing how the performance dynamics that emerge resonate with historical experience.