Environmental Engineering Reference
In-Depth Information
In complex adaptive markets, the traditional linear approach to mar-
ket analysis is unworkable. his is because linear models for analyzing
the evolution of markets require a degree of certainty in regard to causal
relationships. In the presence of causal certainty, afecting a change in one
inluential variable will lead to a predictable change in another variable. For
example, a gasoline retailer that lowers its price to undercut a neighborhood
competitor will, in the short run, generate more revenue that may or may
not make up for the lower proit margin induced by the lower price. he two
variables that govern success in such a market are customer response and
competitive response times. If enough customers are coaxed away from the
neighborhood competitor and the neighborhood competitor's response is
slow enough, this strategy might be proitable. If an insuicient number
of customers switch or the competitor responds by immediately matching
prices, this strategy likely will not be proitable. In any case, the strategic
challenge is linear, involving only a couple of key variables that can be mod-
eled and predicted to a fairly high degree of accuracy.
In complex adaptive markets, such as modern electric power markets,
the seamless web of social, technological, economic, and political forces that
inluence the efectiveness of a given energy policy is too interdependent
and too complex to accurately model. herefore, predicting how a market
will react to a given policy is an exercise in fallibility. Moreover, the contex-
tual diferences between national (and even regional) markets further con-
volute the design of universal policy frameworks that can predict industry
evolution in any sociocultural setting. So if the traditional linear approach
to market analysis is not viable, what is the solution?
Strategic management theory provides some guidance for addressing
this challenge. Historically, strategic management theory also embraced
linear models for guiding corporate strategy development. Broadly speak-
ing, there were two traditional camps of thought. An
industrial organi-
zation
camp embraced a perspective that advocated the exploitation of
favorable market conditions as a central tenet.
5
A
resources-based view
camp embraced the perspective that a irm's internal resources should
be manipulated to create competitive advantage in a given market.
6
Both
are linear perspectives in that they exhibit a belief that if a irm imple-
ments initiatives X and Y, a particular result, Z, will ensue. In the 1990s
this linear perspective came under challenge from complexity theorists
who pointed out that the dynamic nature of modern, global markets was
such that predicting the emergence of trends (which is instrumental to
the success of a linear strategy) was unrealizable. Eric Beinhocker, a com-
plexity theorist, argued that since precise trends could not be predicted in
complex adaptive markets, the best strategy for a given irm would be to
