Capability Building in Sluggish Organizations

In order to thrive, organizations need to build and maintain an ability to meet unexpected external challenges. Yet many organizations are sluggish: their capabilities can only undergo incremental changes over time. What are the stochastic processes governing routinely occurring challenges that best prepare a sluggish organization for unexpected challenges? We address this question with a stylized principal-agent model. The agent represents a sluggish organization that can only change its capability by one unit at a time, and the principal represents the organization's head or its competitive environment. The principal commits ex ante to a Markov process over challenge levels. We characterize the process that maximizes long-run capability for both myopic and arbitrarily patient agents. We show how stochastic, time-varying challenges dramatically improve a sluggish organization's preparedness for sudden challenges.

Automated summary

To adapt to unexpected challenges, organizations need to build and maintain the capability. However, many organizations develop slowly and can only make incremental changes. What stochastic processes govern routinely occurring challenges that help a sluggish organization prepare for unexpected challenges? We use a stylized principal-agent model to address this question and find that stochastic, time-varying challenges significantly improve a sluggish organization's readiness for sudden challenges.