The Sacred Local Optimum

Organizations can become trapped by the very processes that once made them successful.

The argument.

A mature firm is not usually resistant to change because its people suddenly became stupid. The existing system contains accumulated investment: contracts, tools, incentives, reporting structures, expertise and careers. Inside that system, preserving the current optimum can be individually and locally rational.

The problem appears when the environment moves. A process that was optimized for yesterday’s channel mix or technology can remain internally efficient while becoming externally irrelevant. The organization then receives reassuring signals from metrics that were designed around the old equilibrium.

This is path dependence with an org chart. The certain cost of changing is visible immediately; the cost of not changing is probabilistic and delayed. The system therefore keeps choosing the local optimum until the external constraint makes that choice impossible.

Strategy has to create permission to destroy an old optimum before crisis supplies the permission automatically.