Journal of Management Studies 23:1 January 1986

0022-2380 $3.50

A M A r H K M A l I C : A L MODKL OF I H E A D A P r i V E
BEHAVKHJR OK ORGANIZA 1 IONS

I'l I I K U . P R I I ' S K N A N D D . A N N V Mlt.tlK

McGilJ University, Montreal

ABSTRACT

The tecent work on organizati<tnal cimliguration and <}uaiitiuii siiuctural

change by Miller and Friesen (1984), and on ihe population eiology of
organizations by Hannan and Freeman (1978, 1983) suggests some integi'iii
ic'latidiiship.s lietween environments, striutttre and optimal ada|Jtive strategies.
These api>ear to warrant a mort" systematic and formal analysis. Towards thai
entl a tnathematical tiiottel is cieveloped to show the way organizations adapt to
changing environments. Using a Markovian representation, three types of
enviroimieius are examined tn test the implications that the m<>t.le! has (or
adopting strategies of generalisni v.s. specialism, concerted •quantum' vs.
piecemeal change, and hatching changes togeihef vs. changing gradually and
pnmiptly.

INTRODUCTION

Contingency theorists Iiave long been concerned with the

prohlf ni oi matching sn atei^ic and stritt tural (n iciuations wilh the t harat leristits
of the environment. Organi/ulional features are said lo have to l>e compatible
with those of the environment. For example. Burns and Stalker (19(i I) claim that
organic sti ticlures are most suitable to dytiamic f nviionincnts. while mechanistic
ones are be.st lor stalile cotidiiions. Works by I^wrence and Lorsch (I9fi7),
Chandler (1962), Thotnpson (1967), Starbuck et al. (1978) and Woodward
{19(i5) to name i)Ut a few. have also sttessed the iheme of adaptation. Whether
organizations proactiveiy select iheir eiivironnienls (CJhild, 1972) <n" wlieiher
they merely change in response to these environments, there must be a
ftinctional alignment among ihc altrihutes of the organi/alion ;iiid Its context,
liui how closely matched should the organization be to an\' specific environment,
and how quickly should mismatches be addressed?
Organizations change as do environments, and there is a continual need to

Address for reprints: Professor D. Miller, Faculty of Managetnem, Samuel Bronfman Building, 1001
Sherbrooke Street West, Montreal, PQ, Canada H3A 1G5.
2 PETER H, FRIESEN AND DANNY MILLER
adopt a strategy that can effect the best match between tlie two over time (it Um
Imvesi rust!,. In other words, for a dynamic context, the research stope must
expand to consider (xvo cosLs. those of being mismatthed uilh the environineru
(whatever the genesis of such a mismatch) and those (il changing to avoid the
mismatch (Miller and Friesen, 1984). The two costs can be traded oil in various
ways. The organization cati adopt a •generalise nuher than a 'specialist'
orientaiinn, fitting several envii-onmenial stales in an approximate way. liui
being less than perfectly adapted to any one state (Hannan and Freeman, 1978).
(leneralist organizations are less progranmied. specialized and bureaiicratized
and more tlexihle. However, a piicc nuist he paid lui stith llexibility since, for
any one environment, the t>rganization is Ies.s effkieni ilian its more specialized
counterparts, partly because it must recruit expensive personnel who are
sufficiently skilled to liandle a broader array of contiiigendes (Siinchcomlje,
1959). But this cost of mismatch might lie exceeded by the savings derived from
tlie ledtned need to make organizatiotial changes tc» match transitions in ihe
environment (llannan and Freeman. 1978).
Milter and Friesen's (1984) the()i7 suggests that organizations develop integral
strategic and stiucttnal condgtirations ov •gestalts' that ha\e compleinentarv
elements (see also Miller aiul Friesen, 19K(); Miller, 19S2). tlhange will often
involve the destruction of these gestalts and the erecting of new ones — an
expensive process. This view that changes can entail significant fixed tosts
suggests the merits of":
(1) undertaking costly, concerted 'quantum' changes rather ihan piecemeal
changes;
(2) batching changes together to leduce their frequency rather than changing
gradually and promptly.
Miller and Friesen (1984) have argued that lonrerted qiianium change and
hatched change are often required for an economical adaptive strategv — one
that reduces the costs associated with the destruction of gesialts. This is bnrne
out by the recent work of Hinings et al. (1984), Astley (198:i) and Hannan and
Freeman (1983). Ihe iwo choices are. of course, related, since delaying change
in a trending environment tends to increase its ultimate scope and cost.
However, their consequences under different environments can be investigated
indepeiuietuly.
I h e merits of specialism versus generalisni. qtiantum versus piecemeal change,
and hatched versm prompt change can only he dedderl wilh reference to a
particular kind oren\irontiK'in. Fur exatn]>le. if a firm finds itsell laced with the
task of moving into an environment it knows is stable, it will make sense to move
concertedly and qtiickly to specialize in that environment and etijoy the benefits
«)f tight coiiflgtnation and excellent fit (Miller aticl Friesen, 1984). The firm will
lie able to capitalize on this specialization for a long time, and the costs, however
substantial, nf moving into and otit of the environment can lie amortized over
many years. 1 he costs of cliange ihus heconie relatively insigtiific;>nt, and the
rewards wrought by flexibiliiy and getieralism are easily outweighed by the
 A MATHEMATICAL MODEL 3
pi-ofIts from a more perfei i bui rigid adaptation tn ihe stable state (Hannan and
Freeman, 1978).
At the pole opposite lo a siahle envinmment is the Eiiuertiiin eiiviionmcnt ihai
is fine-grained. States are of brief dtn ation and change in an unpredittahle way
The <tnly means of toping wilh sucii change is t<i lie flexihie enotigh to avoid
having to iesjK>nd. Here we pro|iose that generalisni will IK- optimal so long as
the contingencies imposed hy the environment are not (ut-i whelniitigly l.roaci
(Hainiaii and Fieemaii. 1978). C:hange must lie avoided. .\n uncertain coarse-
grained environment in which stales are of lotiger duiatinn can. however,
permit some speciali/atinti. depending on the roaiseness of grain and the tosts
of change.
An environment falling between stahle and uncertain is tine that is trciiding.
and therefore somewhat predictable. Here the firm will often Iw mniivatetl lo
specialize, and this \vill inevitably entail peritwlic re.striicturing. Assuming that
organizational gestalts ntcasinn fixed change costs, we propose that dehned
batched rhatiges will usually be superior tn prntiipt and gradual ones (Miller and
Friesen. 1984).
The.se imprecise conjectures and iheme.s are exiieniety suggestive, L'nlor-
tnnately. there have never been any attempts ini tnally to incor|)niate iheni into
an explicit model. Such a model might allow annplex relationships tn he
expressed precisely and, given its .siarting a.ssumptinns. cntiki alltn-d ihe
IM)ssibility of reaching definite condusinns by (leduciinn. Our attempt in cleveln|>
Sii( h a formal normative inntie! is teutaiive. There are matiy elements
organizational theorists may Mew as impoi tam tn the adaptive process that will
not be taken into account. What follows merely represents a modest effort to
hritig rigour and integration to a field whose fragmented and piecemeal
approaches seetn tn tall fni' it.
The paper is structured as follows. First, our minlel t)f the adaptive situatinn is
flevelnped. I h e disrnssion pnneeds from a fniinal ex|wwilinn of ihe adaptive
task ot a goal-()rientated, ecnnnmically constrained orgatiization facing a deter-
ministic environment, to its characterization over time in a randomly determined
cnvirnnmeni. It is then assumed ihai managers have ai least some knowledge
abniii tlie behavi(mr of their etnirnnmenis and that this is equivalent to
knowledge of a Markov prwess describing environmental behaviour. Nexi, a
sensitivity analysis is presented nl various adaptive strategies in ihree tyjjes oi
environments. It is shown iliat in a trending environment, hatched nigani-
zational changes can be preferable to adaptation to each stage of ihe trend. In a
stable envirnnment, an organization ran twcnme ihorouglilv .specialized v\en
when the cost nl developing and dismantling such specialization is large. Finally,
the sensitivity analysis shows that non-specialized adaptation (generalistn) can he
su|>erior to specialized adaptation In a randomly determined uncertain
environment.
4 PETER H. FRIESEN AND DANNY MILLER
A MODEL OF ORGANIZATIONAL ADAPTATION

For anv envirnnmeni. ;ui organi/atinn tnust select a hehavinur allnwing ii

sinuilianeou.sly lo accomplish its mi.ssion and avoid any long term deplctit»n nl
resfjutces. When the environment changes, the organization's Ijehavintn will
generallv amass and expenit lesotirces at a new rate. Of course if thai rate is
negative, the Ijeliaviour must (hange. and this diange will itself have a cost. In
the long run. as ihe environment undergoes successive changes and the
organization responds with a sequence nf behaviours, resntnces cannot on
average be used taster than they are generated williout tesulting in the
extinction nf the organizatitm.
The resources thai an organization uses to accomplish Its nfiissi<m are taken to
have snme tnoiieiar) value. We assume ihal ihis allows resource use and
acquisition to be sutnmarized as an earning and spending of revenues.
Our mode! seeks m place some factors that should influence organizational
adaptation in a relation that is sufficiently prec:ise to aftorcl ihe derivation of
normaiive implicaiicms. Four elements are central to the model: the repertoire
nf behaviours available to ihe organization, the collection nf environments that
C(»nfront it. managerial knowledge, however imperleci, ab<)ut ilie l)ehavinur of
the environment over litiie, and tlnally the resources used by a sequence of
behaviours designed to cope with a sequence nf environments. Resource usage
n\er time is assumed tn be amenable m aggregation into an ate timulated value
which is hy deHnitinn proportional tn net present value. Survival is jeopardized if
ton large a negative net present value results Irom an adaptive strategy. In
essence, the model specifies ihe organizali()n s adaptation problem as a
Markovian decision process which determines a net present value of resources
for each envirntiiiient. The iiei present value is a function nf a Marknv process
describing the dynamic hehavinur nl the tnvirnnmenl and the aiLipiive strategy
employed.
Without having m s|)ecily any goal or purpose explicitly, we can simply say
that an organizalinn acc;omplishes its aims as a result of seleiiing a behaviour (a
structure and strategy, for example) s from a set S of behaviours depending on
whatever environment e occurs nut of a set F of environments. That is,
behaviotir and etivlrnniiient (s, e) are the independent variables that determine
everything else about the organization, including whetlier or not it accomplishes
iis task. For a business firm, what is most imporiani atM)ut (s. e) is the profit p(s,
e) produced per unit time. A iinn-prnfit nrganizatinn might focus pritnarily
upon the accomplishment of its mission before it concerns itself with finances.
This can be indicated by restricting the Ijehavinur s to a certain subset <i> (e)cS,
assuming that in environment e, the pair (s, e) will accomplish the organization's
mission as long as s is selected from the set ^ (e). The restriction can apply to a
firm ton, l^ecause of the goals, values, and interests nf the dominant coalition.
For example, managers may be reluctant m extend their mission to include
liighly profitable activities that they find unpleasant. The sets * (e), etE would
 A MATHEMATICAL MODEL 5

have no influence on the conclusions of this paper, so lor siiiiplic ity it is assumed
that (j) (e) = S for every ecE. That is, every possible behaviour is lo be
considered in even' environment,
It wilt be assuinerl that organi/aiions would lather acconipli^h their missions
efficiently than wastefully. Firms would pursue the profit that results from nol
wasting resources <tn inappropriate tjehaviour. while a non-profit organization
might prefer to expand its iiiissinn instead o( deliberately chousing a needlessly
expensive way of accomplishing it. If so, all organizations, not just firms, would
be interested in the pnjfn finiction p:S x E —• R, which gives ihe profit per unit
time thai results Irijni any behaviour seS in any envircmment, eeF. Ii follows
that organizations would also seek to control costs specified by the function c:S x
S—» R* which gives a non-negative cost c(s.s') > 0 for abandoning the l>ehaviour
s and adopting s'. This is the cost of impiementing the behaviour s'cS, which
m;iy depend upon the previous behaviour seS.
T h e net betiefit that results from a pair (s', e')€S x E, if e' lasts for some time
period T and if s' replaces the behaviour s, is the net presetil value.
{ \ ( s ' , e') e^^' dt - c(s. s') = {-(I-e'*')}p(s', e') - c(s, s'), which is
() I . •^
ap(s'. e') - c(s. s ' ) w h e r e a = - ( I - e*^' ) is ^ a \ positive number. The present
value is needed in order to compare the time stream of profits per unit time
p(s', e') with a single immediate payment c(s, s')-
If the environment e' is expected to last forever, the behaviour s, is a Iietter
response ihan s^ if ap{S|, e') — c(s, S|) is greater than ap(S2, e') — c(s, sg). In this
rase, a = — since T —* "». If the environment is temporary, the comparison of
responses becomes more complicated. For example, as.sume the organization
knew that the environments of the future would be ej, e-j. e_\, ... and that they
would all last an e(|ual litne T. Then if the present environment en is about to
end and the Ijeliaviour in response lo e)> has been So, the efficiency of the
sequence of behaviours S|, &2> SH. ... in response to ei, e2. es.... respectively would
be measured by the present value, V = ap{S|, ei) — c(so, Si) + 3{ap(s2,e<^) — c(S|,
Sa)} + ... = ^S|p'~'{ap(Si, eO - c(Sj-i, s^)}. Here p=e*^^ is the discount factor
for the duration of one environment. When the environment is expected to
change behaviouial responses cannot be selected in isolation, but rathei" mtisi fn
into a sequence of behaviours that respond adeqtiately to the sequence of
environments. Any behaviour in the sequence affects not only the net benefit
from the corresponding environment but also the cost of adapting to the
subsequent environment.
Under the more realistic assumption that ihe environment does not change in
a deterministic sequence, but rather in one that is subject to random variation,
the comparison of adaptive responses becomes still more complicated. The
adaptive resjMjnse to the strictly determined sequence of environments was a
sequence S], S2, s^, ... of behaviours. This can be expressed as a function f:N-*S
from the positive integers N to the set of behaviours S. However, when the
6 PETER H. FRIESEN AND DANNY MILLER
[utuie environments are noi known for certain, the behaviour cannot be made
contingent upnti time. It must respond to any environment that occurs. This can
be expressed by defining the function t as f:E-*S. which specifies a behaviour
f(e) for every environment, etE.^" Then the eftidency nf the sequence of
behaviours f(ei), f(e2), f(C3).... in response to the randomly determined sequence
« •

ei.e'j, es,,,. would be measured by the expected net present valtie E {ej} [ .^^'~
{ap{t(ei). ei) — c(f(ei-i), f(ei))}, where the expected value is taken over possible
sequences {ej} of envir()ninents. The expectation requires that a probability
distribuiion be defined over sequences of environments. This is our nexi ta.sk.
The expression for the expected net present value resulting from the adaptive
response f can be written as:
VKe,,) =/i^(d{ei} " j eo) | , P ' " ' {ap(f(ei), ed - c(f(e,-,), f(ei))}, where
i>(| eo) is the probability of a trajectory of envlrcmments given the initial
environment e,,. This formula Is accurate only if each etivircmmeni lasts as long
as every other. That will be true if all cnvirnnmeius last tnr some time (rather
than occurring only instantaneously) and if each time period T is made short
enough lo alinw only a negligible prnbabilily nf an envirnnment changing in less
time. Of course ihe same environment can occur in many consecutive time
periods, so the assumption of a constant duration for each time period does not
resitit ill any loss of generality.
It will be assumed that the managers of an nrganizaiit)n have at leasl some
imperfect knowledge concerning the Ix^haviour of its enviionment. Specifically,
it is assumed that an nrganizatinn augments the set E nf envirntunents wiih a sei
M ot auxiliary inf nrmatinn abnut the past trajectory of environments to define a
Markov process on ihe set G = E x M of environmental states. That is, for every
g€(". it incorporates its knowledge of the behaviour nf the environment in a
probability measure ji(-| g) which gives the probability distributi(jn nf which
environmental state will immediately follow the state g. For example, one can use
the auxiliary set M to keep time, in allow some envirnnmenis tn last longer than
others. Ihe f unctiun p can be extended tn G in the obvious way. That is tor any g
= (e. m)£G, we have p(s, g) = p(s, e). The adaptive response of an organization
has tn l>e defined nn G rather than E. and so does the expected net present value
V| whidi is now written as
Vf{gu)= / "(dfgi}.", 1 g,,) I , 3 ' - ' {ap(f(gO. g.) -c(f(gi-,). f(g.))}.
This makes more appropriate the assumption that each environmental state gj
lasts as long as any other. The assumption is made true by proper use of the
auxiliary set M. ^
We have not assumed that the organization has very mticli knowledge of its
environment. If G were finite, for example, it could have probability distri-
butions (Ji(-|g) that make all environmental states equally likely tn fnllow the
state g. This amounts lo complete ignorance ot environmental l>ehaviour but is
quite consistent with the assumptions. In order tn be realistic, our assumptions
 A MATHEMATICAL MODEL 7
are chiefly designed to allow the organization to have a very imperfect
knowledge of its environment, rather than a perfect one. They do, however,
require ihat the organization recognize its environment lo l>e subject UJ random
variation. Naturally, iliis is significant since what is functional behaviour in a
random environment will differ from what is functional in a determined one.
Also, in the interest of lealism. ihe probabilitv distribution is not assumed to
depend on time. Even ii it did, managers would [irobably not l)e able lo detect it,
so il would not infiuence their behaviour.
The probability flistribution of the behaviour of tlie environment in this model
summarizes an organization's knowledge. Accordingly, it cannot liave more
details in it than the organization could be expected to learn from its experience
wiih the behaviour of its environmetit. Therefore, ii is more realistic to assume
thai managers know the probability distribution M.('|g) than lo assume they
know the distribution v('|g). In other words, they only know the probability
distribution of the environments that could (Kcur right after the current
environment geCi, rather than the probability tlistribulion of all of ilie
sequences of environments that could <KCur throughout the indefinite future.
With that assumption, the expression for the expected net present value
function V|:G—•R that results ftoni the adaptive response f:Cr—•S can be
simplified. The probability distribution in the f)riginal expression
VKgo) =/W(l{gi}.", I go) ,|j P'-'{ap(f(gi), gO - c(f(g,-,), f(gO)) can be replaced
by the Markovian one as follows,
Vt<g(.) = ^,/fKdgi I 81-') | , 3 " ' ( 3 P ( % ) . gi) - c{f(gi-,), f{gi))). Then the sum
can be broken into two terms, the first one and the sum of the remaining terms
to give,
Vf<go) = ji>(clgi ! gi-,) {ap(f(g,). gl) - c(f(go). f(g,))}

Since the first term is independent of g, for j 4= 1, the integral can be taken for
each factor in the prodttct except g|, and will etjual one since each measure is a
probability measure. The second term can simply be rearranged to gel V[<g,)) =
g»){ap(f(g,), gi) - c(f(g»), f(g,))} + P M d g i I g,,)

By the first Markovian expression for V(, the second term is equal to
gu) V|<gi)- Therefore with a trivial change of notation, the alwve expression for
V| becomes the recursive form
g){ap(f(g'), g') - c(f{g). f{g')) + pV,<g')}.
If this equation has a solution Vf for every adaptive response f, then it
determines which of two responses f and f is better. If \'( ^ V,, then f is
better. But since we have only a partial ordering, it may happen iliai neitlier
response is superior even though V[ t \\-. hi that case, the best response will
S I'LIKR H. I RIKSKN AND DANNY MII.LER
he a fuiKtinn nt wbidi enviroimiciiial siaif geti the organization is in. since
then eillicT V,(g) a VV (g) or else V|(g) < Vc (g).
1 hough il is not netessary. it will ht* assumed IVnm now on that the set of (1 oi
enviromiu'iital states is finite. 1 he coiidusinns we shall draw cniikl iitsn have
been derived withottt this assumpiinn. but wniikl have involved IIUKII more
alistiaction wiihotit an\ inc lease in our LMK lei standing <il the ladnis iiilluenting
adaptive hehavinur.
Ihe fiiiiteness assumption allows us tn simplify the recursion relation ihai we
have derived tn
V|(g) = I N,,. {ap(ffg'), g') - c(f(g). f(g')) + PV,(g')}.
Here N^,J• is the pinl>ahiliiv ihat g' will follow right after g. Then,
V,(K) = j^^^N««' {iip(f(K'), g') - ;^
This Is
V.<g) = MKg) + P i;,N.«' V,(g') where
M,(g) = XU^^- {ap(f(g'), g') - c(l(g), f{g'))}.
1 his can he written as the matrix equation,
V| = Ml + pNV|. (n-
(I - PNlV'i = M|.'"' I here will l>e a vectttr \^| tnr everv f':(i—*S as long as 1 —
PN has an inverse, since then
V| = (I - pN)^'M|. It (l-pN) dofs nnl have an inverse. I hen det
(l-pN)-O. therefore. I-pN has a iioiurivial inillspacc, aiu! iheie is a vector x
i= U tor which (I—pN) x = t). or p\'x = x. Let x^ he the component ot x having
ihe largest al)so!tite value. Fhen
I x^, I =p I S NjijXj 1 ^ 32 I NVjXj I = P2 N^,i I Xj I s 3 I x^ I 2 Nj,j.
1 herefnte, 1 ^ P2 N^j, in contradiction to the defmition of p as a discount
facinr wilh 0<p<I and N as a stnchaslic matrix with 2 Ni, = I tor every i. That
a cnnliadiction f()il<)ws trnm del (1-pN) = 0, implies liial det (I-^N) * (), sc)
that l-pN does have an inverse. Therefore, V| exists for every f. The
iiiaihemalical Iniiiulalinn nt ecjuations nf ntir type is the general theory nf nnn-
iiegative matrices as tlevelnpecl in a series nf papers in Economelnca (c.f. Debreu
and Herstein, 1953; Seneta, 1973; Solow. 1952; Waugh, 1950). We are ready to
use ihe recutsive model V| = Mj + PNV| to study the adaptive behaviour of an
organ ization.

ADAPTIVE RESPONSES IN DIFFERENT ENVIRONMENTS

We can determine whicli nf two adaptive responses f and f is superior by

solving the equaiicms V, = M, + pNVr and V, = M,. + pNV,.. tor V, and
Vr respectively. However, in this section, we wish to draw generalizations about
 A MATHEMATICAL MODEL 9

adaptive resptmses in different environments wiihntii actually solving the-

equatinns. Ihis will give us a l>etter understanding ol the implications of nur
model than anv iniiiibei of particular snliiiions inighi.
From I he- eqiiatinii \ | = (I — pN)"'Nt| of the previous seclicm. we see thai the
vectf)r of lotal lettiriis V, is determined by the vect(>r of immediate returns M). If
we substitute V, repeatedly into the equation \', = M, + PNVj, we get
V| = M, + pN(M, + pNV,) = Ml + 3NM, + p-'N^M, + ... or
Vj = (I + pN + p-'N- + ,..)M| (see Waugh, 1950).
Comparison with V| = (I - pN)~'M| shows that I + pN + p-'N'"^ + ... is a series
expansion nt (I — PN)~'. The series expansinii will show us more cleartv th.in
(I - p N ) " ' how V|clepends on ihe Ijchavinur nf ihe enviionmeni. The relation
between V, and M| depeiid.s on the behaviour nt the environment as specified
hy Lhe state transition matrix. N. The balance of thi.s section explores this
relation tor several representative specifications ot N.

Adaplittiini to Ernnrntinienlal Trends

A trend in the environment has the state transition diagram shown in tigurc I.
The environment moves from one state tn the next in sequence. Since there is
only a finite number nf states, the sequence must terminate, and is assumed to do
so at state q.

1 2 n |

Kinuri- I. A finite cnvirt)iiinc-iit<il trrtui

Here an nrganizatinn must crhaiige Its behaviour to avoid being mismatclied

wilh the envirnnment. We shall deninnslrale in this section that it will often be
profitable to "batch" changes nt hehav intir in trending envirnnments in ntcler m
save nn c<»sts ot change.
DefinitioJi: T h e cost ot change function c:S X S —» R* is tiniformly .subadditivc if
there is a number K > 0 so that whenever S|. $•>, s^eS are all ditfeient. then c(si,
Ss) s c(S|, Sa) 4- c(S2. S:i) - K.
T h e number K represents a fixed cnsi nf any change which can i^e saved by
making the change from S| to S;i directty rather ihan in two stages from s, to s^
and then from s-_> to S:{.
Consider an adaptive response t: {1 c|} —• S which is one lo one. We will
compare this with a 'batched' response f defined hy r(i) = t(i) when i is odd
and t* (i) = f ( i - l ) when i is even. Then M, = fap(f(2), 2) - c(t(l). f(2)); ...;
ap(f(n+l), n + l ) - c(t(n), f(n+1));...; :ip(f(q). q) - c(f(q - I). f(q)); ap (t(q), q)].
where the first nth, q — 1th and last components of M| have been written
explicitly. T h e state transition matrix is
10 PETER H. FRIESEN AND DANNY MILLER

I 2 3 . . . q- I q
I 0 1 I)
N = 0 1

q-1 t) I
q

if N,i) is the ith row nt lhe mairix N, ilien V'|(l) is represented by the infinite
series. V|<I) = [1,^ + pNni + P'Nfn + ...]Mf, which by the form of N equals,
VKl) = M|(I) + pM|<2) + ... + p''^'M,<(|) + p''M,<q) + ... The component
M(<q) ap[>ears an infinite number nf limes because the envirnnmeni keeps
repeating stale q. If the sequence is long enough m make p'' negligible, this state
will make only an insignificant ctmtribution to V|<I). Tn compare V|'(l) with
V|<1), we form
Vr'(l) - V,{I) = {c(f(l). f(2)) - a[p(f(2). 2) - p(f(l), 2)]}
+ p (c(t(2). f(3))-c(f(l). f(3))}
+ P- {c(f(3). f(4)) - a[p(f(4). 4) - p(t(3). 3)]} + ...
tf the cost function is uniformly subadditive. this gives
V,'(I) - VKD s {c(f(l), f(2)) - a[p(f(2). 2) - p(t(l), 2)]}
+ P {c(f(2), f(3)) - c(f(l). f(2)) - c(f(2), f(3)) + K}
+ ... or.
V, (1) - V,(l) > {(1 - 3)c(f(l), f(2)) + 3K - a[p(f(2). 2) - p(f(I). 2)]}
+ P'{(I - P)c(f(3), f(4)) + PK - a[p(f(4). 4) - p(t(3). 4)]}

Since p is not m u c h less tlian 1. t h e first t e r m in each curly bracket is small.'^*

The other two tetms reptesent a saving pK frotn skipping a change in
tjehaviour, and a toss of profit due to using a Iwhaviour ihai is nni quite
appropiiate lo the changed environment. Clearly, if the saving frtun batching
iwo changes into one is gieater than the loss in profit caused by lagging the
envirnnmetit. it is better to batch changes, If f is unspeciatizect in the sense that
p(f(i- 1). i) is nearly equal to p(t(i). i). tlieii batching will l>c beneficial because the
loss in profii due to lagging the environment will be minimal. In general, we
expect iliat batching changes is desirable in trending environments when
changes are costly.
 A MATHEMATKIAL MODEL 11
A(Utpliau lo SUtblf Eiwiroriuwtiis
We will show that it will usually Ije beneilcial for an organization to .specialize its
behaviotn- !br a stable environment, e\en if ilie cosi ol changing liehaviotn- lodo
st) is large. The stable emiromnent will be inilwdded in a iiend so thai ihe
contrast with the previous situalion wiil lie more itbvious. Phis has the transition
diagram shown in figure 2.

O
r-1 1 r+l

Figure 2. Environ mental irciul wiili a sial)lL' siati-

The stable environment v has a probability v=l of leLLuring and it probability

l-v of not recurring, in which case the trend continues. Here we would expect
the prol'ii in state r to make a large coniribution to V|(I) so that the selection of
((r) wotild be more importanl to ihe organi/alion than its behaviour in any other
stale. The inijxjrtance of f(r) can be shown as follows.
Let state r occur fairly soon after state 1. Then p' is still large so thai stale r is
important to any oiganizalion in slate 1. Also let q be temporally dislanl from
state I so that P'' is neghgible and siaie q does not maiit-r lo an organization in
state 1. Then,
M, = tap(f(2), 2) - c(f(l). f(2)): ... ;ap(f(r), r) - ctf(r-l). f(r));
1 r-I
captor), r) + (l-v){ap(f(r+1), r + l ) - c(f(r), f{r+l))}: ... ;

ap(f(q). q) - c{f(q-l), f(q)); ap(f(q), q)] wheit- the first, (r-l)tli, nh.
q-1 q
(q-I)th and qih components have been written explicitly. Notice that the rth
romponeni is a weighted average of ihe profii in stale r and ihe nel benelil in
state r + l .since the state subsequent to r may lie either r or r + l . The state
transition matrix is

1 2 3 . . . r r+l r+2... ^
0 I
0 1

N = r V l—V
r + I {)

q- 1
q
12 PETER H. FRIESEN AND DANNY MILLER
Then V,(l) = (I,,, + pN(i) +^^ N^i,+ ...)M,, or

+ (l-v)M,{r+l)}
r) + vll-WMKr+l) + (1-v)M,<r+2)}
l) + v(l-v)M,<r+2)

This can be rewritten as

V,<I) = M,{1) + -.. + |3''-M,<r-l)
+ M,(r)(P'^-' + P'v + P'^V' + p'^^' + ...)
M

which is.

+ M, (r+l)p'(l-v)(I + py + p-v- + ...)

+ M,<r+2)P'*'(l-v)(l + py + p V + ...)

or,
3.
l)+
PM|<r+2) + ...))
If all of the money amounts are measured in constant dollars and If the
duration nf a state is one year, then a reasonatsle value for p would be about
(1.97. Ihis assumes that lhe nrganization s teal cost of capital is 3 per cetit )>er
year (c.t, Weston and Brigham, 1974, p. 495). By assutiiption. v is large, say 0.99.
Then • is about 25. If r is 5 say, then p'~' = 0.9 so the term in paren-
l-pf
theses has at least 20 times as much weight as any other term in the sum. Also of
the two terms In parentheses, the first has 100 times as much weight as the
second since I —y=U.01. Theiefoie, by far the dominant term in the sum is the
lerm containing M|<r). As we noted earlier M^r) = i'ap(t(r). r) +
(1 -y)[ap(f(r+ I), r+1) - c(f(r). f(r+l))]. so the dominant term in the expression
tor M[tr) is the one conuiiiing the protU p(f(r). 1). We can conclude tlial the
(>rganizati<m should select f(r) to exploit state r even ii the changes from t(r- 1)
or to t(r+ t) would have to be revolutionary and costly, that is. even if the change
costs c(f(r—1), f(r)) and c(f(r), f(r+l)) were very high. Because nf the factor
\-v, the cost c{t(r), f(r+t)) teceives only one hundredth lhe weight of the
 A MATHEMATICAL MODEL 13

profit ap(f(r), i) in the expression for V(<1). Also the cost c(f(r- 1), f(r)) appears
only in the term for Mi<r-1) which receives less weight than Mt(r) by the factor
P
T—;r— . or aliout 20 times less weight. In oiher words, stable environments very
l-pv
strongly favour specialization in one environment, even if specialization i.s cosily
to achieve.

.'\ii(if)Uili<m lo Uiicertain Eiivironnnnils

In this section, we .shall aitempt to determine the impact that two types of
unrerlain environinenis have upon the choice o( adaptive straiegies, 1 he fiisi is a
coarse-grained environment {Hannan and Freeman, 1978) in which each
environmental state lasts a long lime. The second is a fine-grained environment
in which stales are ileeting. We shall see ihat a slrateg\ of generalism is desirable
in all uncertain environments, especially in those that are fine-grained.
However, as the grain becomes coarser, specialism Ijeccmies more desirable,
though not as desirable as it would be in a stable environment.
We will also itnlx-'d the uncertain environment in a trend to keep the
(iifference fVom the trending and stable situations as sitiiple as possible. The
li,uisitioii diagram is shown in figure 3, Ihe ttncertain environment r has a
probability \x. of changing to environment r+ 1 and a probability I—p. of staying
the same for another lime period. Similarly, the environment r+l has a
probability v of changing back lo environment r. However, environment r+ I
also has a probability TT, assumed to be small, of changing to environment r+2,
in which case the envirtjnmental trend continues. Ihen the probability of
environment r+l lasting another time period is l — v-n. Since IT is small,
environments r and r+1 are stable, but because they tan change back and forth,
bolh environments become uncertain. Again we assume thai r is sufficiently
small to make 3"^ large enough for r to affect V,f 1) iniporianily. On the other
hand, we assume ihat q is large enough to make P'' small, so ih.it q is
unim[>ortani lo planning in slate 1.

1 2

Figure 3. Environ mental trend witli cwti uiii.cri.Tin states

14 PETER H. FRIESEN AND DANNY MILLER

For this environmental behaviour, the vector Mr is given by

M. = [ap(f(2), 2) - ; ... ; ap(f(r). r) - c(f{r-l). r);
1 r-I
). r)} + ^l{ap(f(r+I), r+l) - c(f(r). f(r ). r)
r
), r+l)} + iT{ap(f(r+2), r+2)
r+l
; ap(f(r+3), r+3) - c(f(r+2). f(r+3)); ... ;
r+2
ap(f{q). q) - c ( f ( q - l ) , f(q));ap{f(q), q)]. Here the ilrsi, ( r - l ) t h , rth, (r+l)th,
q-1 q
(r+2)th, ( q - l)th and qth components have been wriuen explicitly, Boih the rth
and lr+I)th components aie weighted averages of net benefits in several
environmenis l>ecause Ixnh of ihem are uncertain. The state transition matrix is
I 2 3 . . . r-1 r r+l r+2 r + 3 . . . q - 1 q
0 !
U 1
r-1 0 I
N = r
, - I' - IT IT

r+2 0 1

q-l
q

We want to calculate V,il) = (Ini+PN,,, + ... + 3"N';i) + ...)Mr. but this time
we cannot compute N','ii hy insj)ectioii. We will get N" as the inverse geometric
transform (Howard, 1971, p. 43) of the matrix (I-zN)"'. The matrix 1-zN is
given by

1 2 3 ...r-1 r +1 I -I- 2 r + 3 . . . q-1

1 1 -z
2 I -z

r-I -z
' r 1-(1-M.)z
r+1 —TTZ

r+2 1 - Z

q-1
1-z
 A MATHEMATICAL MODEL 15

I Q _ N
1 M 1 '—I
T E^

N bc

SI

^' C

a 7 Q I

z
N
1 1 9"
1 1
Q
1
c
1 -a Cu
r 1
T ^1

c
C JJC
I(i PETEK M. FR!ESEN AND DANNY Mil,l.i:R

We need only ihe fhst niw of N". which is the inverse f^eometric iransform of the
first row of the above matrix. By inspection N'n equals one when n=() and equals
zero when n > 0 . Similarly for

je{ 1 r - 1 } . N'l'j = 8j ,,.^, where 8, ,,,n = { , }. This asserts ihat

0. I 7^ n + 1
ilif environment will change from stale 1 to siaicj i n j - 1 uansiiiotis. IO liiid N',',
we \iced ihe inverse geometric transform oi'

The (|iiachalic expression in the denoininaior tan be wiiitcn as

II I lie roots oi I lie ({iiadiaiic i actor .ue denoled /.\. and / j , this is

(I—/\),,, can lie written as —{ +

(or s o m e A, B ii A(/-/._.) + B ( / - / | ) = I - (\-v--n)/ ( H o w a r d . h»7l, p . 55).

riien - A / ^ - B / | = 1 iind A + B = - ( I - I ' - T T ) .

I herelore B = and A = .

. , 1 - 1 1 , , , .
Also, = has llie geoineiru: series expan.sion
1

(1 + (—) z + (— )^•£,'+ , . . ) . SO i h e coeiflcient of z" in t h e expansion of

l\ Zi Z|
(I-/N)r,' is
0, n < r - 1
1 - ( l - v - t r ) / ! _l_ ^ _1_ j . , _ , .
N'lV =
[(I-fi.)(I-v-Tr)-M.i'] /L'-'I 'I -^1
_ (I - (l-v—n-)za) 1 I ,,-,-+u

when n a r—I.
T h e dependence of N". on n is included in the factor (l/zi)""'"^' in tlie Insi
lerm of N",. and in (l/z^)""'"^' in the secon<i term. Later, it will be shown that

both— a n d — a r e real numbers with absolute values le.ss than one.

Z| Zo
 A M.^THEMATICAL MODEL 17

Therefore, { — )"-' + " m^d ( _ ) " - ' + ' are factors that decay exponentially as n
increases. One of them will in general decay iaster than the other. The factor
that decays more quickly will be called relatively transient and the slower factor
will be called relatively stable.
If TT were e(]ual to zero, tlie larger reciprocal would equal one so ilie relatively
stable term would l)e completel) stable. The behaviour of the en\ironineni in
states 1 and r+l would then be a standard ergodic Markov process with a
.stationary probability distribuiion. Tlie stationary probabitilv of the prcKess
l>eiiig in environment r would be given by the stable term in the expression for
N'lV- However, ii seems more realistic to assume that no small set of
eiiviit)timenls is ever completely stable, so we have made all of the environmenis
iransienl, except for ihe qth, Eiivironmeni q is not allowed to have much
influence on Vt(l) since it is placed in the transitit)n diagram where it can occur
only long afler environment 1 has <Kcurred.
To be more explicit aliotit the beha\i<)ur of N", as a function of n. we need to
look more closely at /,] and L-I. The roots are
Z , . Zy =

(l-v-rr)f -

These are real numbers since [(l~h*-) + ( I - V - T T ) ] ^ - 4[(1-p.)(I-v—TT) —

(I-v-TT)]- + 4M.V > 0.

We also ktiow that otie of the roots is positive and thai both have absolute valties
greater ihan one. This is because the quadratic of which these are the roots is the
deierniinani
"l - (l-^l)z - jw ] ^ ., Av u
= det (1-zA) where A =
- VL 1 - {\-v—a)i
Notice that del (I-z.A.) = z det QI - A) = I det (\I - .A.) Therefore, nonzero
z \
rtK>ts of det (I-zA) ha\e reciprocals which are roots of del {\1 - A). A is a non
negative matrix with one row sum equal to one and another less by the amount
TT, where I > TT > 0, The Frobenius-Perron theorem (c.f. footnote :i, Debreu
and Herstein, 1953) then tells us ihat the root of det (\1 - A) having the largest
absolute value is a real number In the open interval (0, 1). We can conclude that
both reciprtKa! roots- and— have absolute values less than one, that at least
one is positive and that the other has no larger an absolute value, Ihereiore, the
relatively stable term in Ni', declines slowly without oscillating, while the
relatively transient term may oscillate.
18 PETER H. FRIESEN AND DANNY MILLER
I h e rate (jf tlecline in ihe relatively stable lerm in depends on TT. If IT
vanishes, for example, ihen Z|, L-> =
' 1{(I-H) + ( l - v ) } ±

The relatively stable lerm then becomes completely stable.

—)" '"^' = (I - p -
T h e relatively transient factor (—)" for n s r— 1 ()scillaies if
•/.•)

l - f i - v < 0. In that case, the transition probabilities M. and v ;ne high

enough lo make it moie jirobable that the environmeni r will occur in lime
period n if it did noi occur in period n - 1. If ihe transition probabilities are low,
then l-tt-V > {), so the iact ihai environment r occuired in period n makes it
probable thai it will also occur in period n+1. When ihe transition probabilities
ji and V are both near 0.5. the absolute value of l - p . - v is sniafl and the
iransienl decays fast. When the transition probabilities are near zero or one. the
absohue value of l-|i,—v is near one and ihe transient decays slowly. This is
liecatise the transitions are then predictable enough to make the probabiliiy of
environment r occurring depend siroiigly on wbeihei- it occurred in the pre\ ious
lime period.
1 he reclprtjcal loots beliave very similarly when TT ^ t). Wiien p. and v are
near 1. the roots are near I and - I . When p. and v are near zero, the
reciprocals are both near 1. Finally when p, and v are both near 0.5. one t)f the
reciprocals is near I and the oiher is near zero, implying that the transient decays
rapidly, to bring the probability of environment r occurring to its level of
maximum uncertainty.
We continue the calculation ol V|(l) by finding NV, for j > r.

First, (I-i •{ ( )}. so that

I-,-1,, I-

0, n < r.
1
N'li _

[(l-|x)(l-v-7r)-^Lv] . > - Z | L\ '2 —Z[ Z2

r+l
7.
Also, (I-z }, SO that

(). n < r + I,
I l.-l-l 1 I
N|.+:> =
Z| Z|

n > r+ 1.
Similarly for ie{r+3 q~U'
O.n<J-l,
NV, = 1 i
ZJ Zj —1.1 l'^ l2

sj- I.
 A MAI HEMAIICAL MODEL H)

We will nol tieed the expression ior N']',, because c] is large enough lui' its
contribtilion to V,(l) m be insignifurant.
Now V,(l) = {I,,, + PN,,, + p-N'-'n, + . . .} M,, ..r

' " ' Mi(r)

Zo — / 1 Z-2 Z'2

-d-y—rr)z^ 1 1
t-j — Z | {t>>
— )( — ) } M,(r)
1

M|(r+2)}

[( 1 -IJ,)( I - V — I T ) - JXV] /L>-ZI /I /1 'L'-ZI

-j —Z| Z] Z|

- (l)}M|<r+2)+nirM,<r+3)}

Therefore. V,{I) = M,<1) + PM,<2) + . . . + p-'-^

(1 — V—IT) —(xv] Z, Z,

I—(l—V'—TT)Z.> ! P

Z2~ Z1 Zy Z^

V
1 ( 1 - J i L ) (1 — V—IT) — V-v\ 2-Z1 Z| Z| Zo-Z|

M,

This equation can he simplified in four steps as follows.

20 CE rt.R H. FRIESEN AND DANNY MILLER

+ l(l-M.)(l-v-'ir)-M z^-'-i P-^i -^I'-Zi P-'i!

} M,(r+I)

, _

By the clcllniiionsol Z| and /-•> given earlier, the deiioiiiiiialor in lhe coefficient
muhiplyitig M|<r) is the quatlratic defined in lhe expression lot" (I —/N)~ .
Therefore. V,<I) = M,<1) + PM,(2) + . . . + p'-^MKr-l)

(1 -(1 - (jL)pK I -(1 - I ^ -

This is just V|<1) = (l-pN),"i|M), an expression we could have obtained by

substituiing p lor i in (I-zN)^' earlier. However rhat, ol coinse. would not
have shown how the terms of VKl) depend on the underlying Markov process.
Notice that if IT is small, then MKr+2), M|<r+3), etc. each make a much smaller
contribution to V|( 1) than do M|<r) and M|<r+1). Since (I -(1 -
is small, the terms for MKr) and
 A MATHEMATICAL MODEL 21
are much larger than any other terms. We can substitute the expressions for M|
in ihe above equation lo get,
= {ap(i(2).2) - c(f(l), f(2))} + P{ap(f(.S), 3) - c(f(2).

c(f(r), f(r+l))}
PV - {v[ap(f(r),r)-c(f(r+I), i(r

(l-v-iT)ap(f(r+l). r + l )

TT[ap(f(r+2). r+2)"C(f(r+l). i(

r {ap(f(r+3), r+3)-c(f(r+2). f(r+3))} + .

When the transition probabilities \L and v are very small, the environmeni r
becomes ihe stable environment discussed in Adaptation lo Stable Environ-
menis, al>ove. The same conclusion ihen applies, that 1 should lie chosen lo make
p(f(r). r) large, since the profit in environment r is by far the dominant
contributor lo V^l)- In other words, the organizalion should specialize in one
type of environmeni.
When the transition probabilities are close lo one, ihe coefficients of M(<r) and
M|{r+ 1) in the expression for V,(I) are roughly equal to

——7, and ^ respectively. Since r is a small integer by assumption and since

l-p^ = (l-p)(l+p)= (0.03K2), each of the coefficients is at least 15 times as

large as thai for any other environment. Our earlier expression ior M| shows
M|(r) to be approximately equal to ap(f(r+ 1), r+l) - c(f(rj. f(r+ 1)) in this case,
whereas MKi + D equals alxnit ap(f(r), r) - c(f(r+1). f(r)). Since these are the
dominant lerms, it is very imporlant to ensure thai ihe change costs do not
cancel the profits. To do this, an organization would choose i so that the
behaviours f(r) and f(r+ I) are simple variations of each oiher. This would make
the change costs small. Since each beliaviour has to be chosen with the other in
mind, neither will be as closely adapted to its environment as it could be. In the
usual terminoU)gy the behaviour chosen for one environment will be an
unspecialized behaviour which can be easily adapted to the other highly
probable environment. Organizations facing uncertain envinjnments should
pursue the generalism discussed by Stinchcombe (1959) and Hannan and
Freeman (1978) so that they can readily span several environmental states.
If ihe transition probabilities are substantially below one, the expression for
Mt shows thai the profits p(f(r), r) and p(f(r+l), r+I) make bigger contributions
to MKr) and MKr+1) respectively. In this coarser-grained case, the behaviours
22 PETER H. FRIESEN AND DANNY MILLER
f(r) and f(r+l) can be adapted a little more closely lo their coriesponding
environments. Ii is pei missible for change costs to be somewliai larger Ijecause in
any given environment, changes are quite unlikely. (Consequently greater
specialism is desirable.

DISCUSSION AND CONCLUSIONS

Our model lias characterized the adaptive task as a dynamic process. Organi-
zations miisi consider sequences of future environmenis in order lo e.siablish the
I>esi adaptive strategie.s. But we have shown that the knowledge managers must
have alM)Ut such sequences need nol be great in order for it lo have important
implications for the selection of sli'ategies. It is merely necessary to be able to
specify the set of possible environments that occur first in the possible sequences,
iilong with their probabilities of occurring.
Of course, the probability distribution of environments that managers expect
to occur may not be the true one. Various errors can occur. If managers impute
loo much certainty to the f utitre, they will specialize too much, adapting to too
small a set of environmenis. On the other hand, impuiing loo much uiiceruunty
will result in under-speciali/ation. The costs thai arise from these errors will tend
to cause organizational learning and lo limit the difference between the
perceived distribution and ihe actual one.
We have seen that there are trade-offs that the organization can make in
balancing the costs of mismatches with those of change. But the balancing and
trading off is constrained by Uie drains on capital that are incurred. It is alw-ays
necessary for the organization to change its behaviour when the net present
value of its stream ol rewards is negative; that is. when its losses dissipate its
capital. Too great a drain on capital causes the organization to fail.
The actions required of an organization to keep a positive net preseni value in
a given environment depend not only upon the current environment but al.so on
the behaviour of the environment over time. Over relatively long periods, the
evolution of the environment may follow one of three patterns: a trend, a stable
stale, or random Huciuaiion within a collection of environments.
If there is a fixed cost in changing an organization's behaviour, managers
must follow a trending environment in batches of stages rather than responding
to each siage of the iiend. 1 he behaviour adopted for a batch of stages will in
general be less profitable for each specific stage in the batch than a behaviour
specialized to each stage. However, the expected loss in profit from mismatching
can be recovered from savings in the cost of changes.
On the other hand, if the organization enters a stable environment it has an
Incentive to specialize il.s behaviour lo that environment. If can afford to
specialize even if a revolutionary (costly) change oi behaviour is needed to do so
and even if anotfier revolutionary change of behaviour will be required
whenever the stable environment disappears.
 A MATHEMATICAL MODEL 23
When the organization's environment is uncertain, it cannot afford to
specialize for any of the individual environments that are likely to occur because
profits from specialization soon turn into losses wheti tlie environment changes.
Instead, the t)rganizatioti must adopt a behaviour thai dots fairly well in all oi'
the environments that are likely to occur. Otily tiiitior (cheap) modifications to
this generalist approach can be made if profits are not tt) be absorbed in the costs
of changing the organization's liehavioiir. ln short, many of the contentiotis of
Hannan and Freeman (1978, 1983) and Miller and Friescn (1984) are quite
consistent with the model.
In closing, we should note that our model represents only a first step in
describing the adaptive process formally. Many refinements and distinctions that
are well-known in the literature were not made, fhough we make the
specialism — generalism and batched versiL\ non-batched change distinctions, we
deal only in getieralizaiions. There bas been no Liirempi made to incorporate ihe
details of strategies or structures that represent the components of our
'liehaviour' category. Each of these components might behave vei^ differently
and their further study might do much to make our mode! richer and more
applicable.
Ihe purpose of this paper was to demonstrate the role of tTiaihematital
modelling in exploring the consequences of organizational adaptive strategies in
dilferent environments. Formal modelling can vastly increase our appreciation
of the problems of organization design and uncover important new constraints
and relationships. It will he partictilarly useful in detetmining the ellicacy of
various strategies of structural change (Miller and Friesen, 1982, 19H4) and the
consequences of the assumptions made by the organizational ecologists (Hannan
and Freetnan, 1978, 198-t).
As the social sciences mature it will become increasingly necessary to integrate
piecemeal findings and atomistic conceptions into logical and coherent theories.
Ft)rmal modelling can help in lhe synthesis, systematization. and investigation of
new theoretical frameworks in a field thai has too often been characterized hy
brute empiricism and non-cumulative research. Unfortunately, organization
theorists generally have little training in mathematics. In this respect we hope
that they will begin to emulate the economists.

NOTES

[I] Minor modifications of the subseqtient argument would cause it to be true

also for the larger collection of strategy functions f:S X E ^ S. which make the
choice of action contingent upon the previous action as well as the curtent
environment. These functions would be needed if we wanted to find optimal
strategies. However we shall gain considerable insighi into organizational
adaptation with tnuch less complexity if we study only the subopiimal strategies
f:E -* S.
24 PETER H. FRIESEN AND DANNY MILLER

[2] This derivation is similar lor optimal strategy functions f :S x G —* S, except

ihat g and g' have to be replaced everywhere by (s, g) and (s', g'), respectively.
Then N comes to be replaced by N' = [N'v«,,,,-,^',1 where N,',,^,,„-,,,•) = N^^-
whenever s' = f(s,g).and the other elements of N'equal zero. The new recursion
equation is Vf = Mf + pN'Vf, but now M, and V, are functions on S x G, not on
G. However we shall continue to study the simpler adaptive l>ehaviour
represetited by f:G -* S. This amounts to forcing f:S x G -• S to l>e independent
of its first atgument. allowing a simpler recursion equation to l>e derived.
[:l] If each environmental state is assumed to last one year and costs and profits
are measured in constani (inflation adjusted) dollars, then p equals one minus
the organization's real cost of capital per year. A reasonable real tost of capital
(c.f, Weston and Brigham. I'J7'4. p. 495) is three per cent, in which case
3 = 0.97.

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