Moving far from far-from-equilibrium: Opportunity tension as the catalyst of emergence*

What is Life?—A Thermodynamic Explanation

One of the earliest explications of the far-from-equilibrium view of organization was developed by Erwin Schrodinger (1944) in his remarkable book, What is Life? Following his significant contributions to quantum mechanics in the 1920s and 1930s, this book presents an integrated theory about how the biological world operates—

What does it mean to “suck orderliness” from its environment? Essentially he’s suggesting that “order” is a compact form of energy; for an organism to maintain itself, it needs to import high degrees of energy into itself. This insight became the core of open systems thinking (Katz & Kahn, 1966; Thompson, 1968) and general systems thinking (von Bertallanffy, 1956; Miller, 1978); it also provides a theoretical framework for autopoiesis and similar models (Maturana & Varela, 1980; Drazin & Sandelands, 1992). Moreover, the empirical details of Schrödinger’s idea—that systemic order is only maintained through a constant, far-from-equilibrium influx of energy from the environment—were worked out by Prigogine and his associates as the theory of dissipative structures (Prigogine & Glansdorff, 1971; Nicolis & Prigogine, 1989). Their approach was nicely summarized by Maguire and McKelvey (1999: 29), and it forms the starting point for McKelvey’s long-time exploration of complexity in management:

By this formulation, the more entropy that is dissipated, the more order is created, through a web of nested and coevolving ecologies (Weber et al., 1990). Thus, as further levels of order are created, the system as a whole moves farther and farther away from equilibrium. Or does it?

Far-, Farther-, and Farthest-Away-From-Equilibrium

To draw out the metaphor in economic terms, consider the analogy of the firm as an “energy conversion system” (Slevin & Covin, 1997) of inputs, transformations, and outputs (Scott, 1981). In the most simple example these inputs are essentially its revenues, cash flows and core resources; internal transformations represent the business functions and entrepreneurial activities that produce value for customers (Afuah, 2004), and the outputs are the goods or services being offered by the organization. In exchange for the value customers receive through these goods or services they purchase these offerings using money, which in this analogy represents a highly compact form of energy—a generalizable medium of exchange. In sum firms “convert” potential pools of resources, i.e., a potential market, into revenue, by creating products or services which serve this market; the money which customers exchange for the value they receive is the energy that literally sustains the firm.

In its simplicity (by removing the many complexities that would be required to explain most interesting organizations) this example offers a thermodynamic response to the question of how organizations operate in “far-from-equilibrium” conditions. We begin with the definition of equilibrium in thermodynamic terms: equilibrium represents the absence of potential, the eradication of difference, the complete cessation of all activity (Adams, 1988; Dyke, 1988; Odum, 1988; Swenson, 1989, 1992). “Economic equilibrium, therefore, constitutes a point of rest from which there is no endogenous tendency for any individual, form, or market to change” (Meyer etal, 2005: 459). In contrast, as soon as an entrepreneur engages in value-creation activities which are enjoyed by customers who exchange the value they receive for money, the ‘system’ moves away from equilibrium and toward a non-equilibrium dynamic. If the market need and the venture offerings are sustainable, the entrepreneurial firm can exist in a dis-equilib-rium dynamic state for quite some time. From this logic, the higher the exchanges between the firm and the environment—in terms of resources, including cash flow or revenue—the farther away the firm is from its zero-activity equilibrium point.

The implications for this thermodynamic framework are significant. At one end of the spectrum consider the classic mom and pop grocery store, or small manufacturing firm. These organizations exemplify a simple business model design (Zott & Amit, 2007) that generates a dynamically stable organization, in which net revenues from sales, i.e., operating revenues with Cost of Goods Sold subtracted, are sufficient to pay for Fixed Costs including employee and executive salaries. “Lifestyle ventures” like these are organized primarily to create a stable lifestyle for the lead entrepreneur(s) and those they employ. From this view, all companies operate in some degree of non-equilibrium conditions (Dyke, 1988; Robb, 1990). We can, for example, define the “distance from equilibrium” of a firm as its overall cash flow, revenues (or some other financial ratio), such that the more of these revenues flowing through the firm, the farther-away-from-equilibrium the firm would be operating.

Pushing the metaphor further, some ventures identify larger pools of economic potential, i.e., larger markets (Bhide, 2000) and more valuable technologies or business models; clever entrepreneurs find new ways to capitalize on these potentials by creating and accessing the resources necessary to produce value in a sustainable way (Stevenson & Gumpert, 1985). The more resources and the more value that can be produced—assuming there is a sufficiently large market that will purchase the offering—the farther away from equilibrium the firm will be operating. Thus, a small manufacturing firm will be a moderate distance away from thermodynamic equilibrium, a large company will be much farther away, and huge multi-national corporations are the farthest-away-from equilibrium. By this reasoning, the farthest-from-equilibrium firms in the world—measured by net revenues—would be Walmart, GM and Exxon/Mobile—the latter earned $40.6 Billion dollars in net profit in 2007, with more than $400,000,000,000 in revenues.

However, this scientific analysis runs counter to the common management metaphors associated with “far-from-equilibrium” conditions; including “...the constructive role of disorder and even crisis in organizations, as well as the merits of management relinquishing and distributing control to a more autonomous work-force” (Maguire et al., 2006: 173). Far-from-equilibrium conditions that managers face are neither predictable nor linear, instead they lead to “ongoing, perpetual novelty” (Meyer et al, 2005: 470).

In contrast, Exxon and GM seem to exemplify the opposite: Firms that abide by a model of General Linear Reality (Abbott, 1988), with managers who lead by control, under the assumption Gaussian averages rather than Paretian extremes (Andriani & McK-elvey, 2009). The recent “Great Recession” has shown, if nothing else, the inaccuracy of these assumptions, highlighting the dis-equi-librium nature of our social world.

Creating Emergence?

To review: The goal of this essay is to highlight a contradiction in how we as complexity researchers explain what catalyzes emergence. I started by identifying the two versions of those explanations: far-from-equilibrium dynamics, versus adaptive tension (Figures 1 and 2, above). Then I reviewed the underlying assumptions of far-from-equilibrium dynamics, by presenting a simplified version of the firm as an “energy conversion system.” In this economic analogy to a thermodynamic system, distance from equilibrium technically refers to the degree of energy flowing through the system, measured by the amount of revenues (or cash flow) in the firm. Extending this metaphor to its logical ends shows that the farthest-from-equilibrium companies are those with the highest revenue streams.

However—and this is the core of my argument—these firms don’t exemplify the novelty, flexibility, and adaptability that could catalyze emergent order. In other words, huge companies like GM, Exxon/Mobile, and WalMart—far-from-equilibrium though they may be—do not appear to embody the conditions that initiate the creation of new order. Rather, when we say “far-from-equilibrium” we seem to imply something quite different from its technical meaning, something much more dynamic, creative, innovative, and nonlinear. But these meanings are imputed as metaphors, they are not embedded within a rigorous analogy to the thermodynamic science.

On the other side, McKelvey’s “adaptive tension” presents a useful but also incomplete view of how emergence is catalyzed. Adaptive tension is caused by external situations, whether a market-based performance gap or an external directive to change course. Specifically, McKelvey (2004: 319) defines adaptive tension as “an imposing energy differential” that can spark a phase transition; this differential reflects an “externally influenced” change to the “control parameters” of the system.

However as any entrepreneur knows, the creation of new business venture is almost never sparked by external influences alone. Organizational emergence requires significant initiative and entrepreneurial action (Gartner, 1993). Even the most basic view of opportunity recognition requires an entrepreneur who is alert to external changes (Kirzner, 1997), and who takes risks that reflect his/her experience, expertise, and access to resources (Ardichvili, Cardozo & Ray, 2003).

To be clear: adaptive tension represents a crucial aspect of emergence, namely exogenous market changes that lead to new (and newly perceived) pools of potential resources. Far-from-equilibrium conditions, on the other hand, represent an endogenous source of variation and change, which also plays a crucial role in catalyzing emergence¹. Both elements are important, but neither one alone is sufficient to initiate the process of order creation. Formally, neither far-from-equilibrium conditions nor adaptive tension on their own may be sufficient to catalyze emergence. Can these two constructs be integrated in some way, offering a more dynamic view that incorporates the endogenous and exogenous elements of emergence?

Opportunity Tension is Rare

Although novelty and improvements are happening all the time, the actual initiation of opportunity tension is not a common activity. Only a unique or unusual event (Andriani & McKelvey, 2007) would have the power to push an entrepreneur or an organization beyond its structural inertia, to start a process of novel organizing and emergent order creation. McKelvey (2001) shows this in his exemplar of adaptive tension: Jack Welch, as the CEO of GE, catalyzed adaptive tension in every business there by giving them only one success metric: “Be #1 or #2 in your industry, or be reorganized, split up, or sold.” This charge is not an “average” or “normal” event—it is extreme, perhaps one of the most extreme challenges ever given to a group of companies. And the result, conditioned by Welch’s remarkable leadership, was also extreme, as GE became one of the most financially successful corporations in the past 100 years.

This kind of extreme event is driven by opportunity tension: Welch as entrepreneur creates an internal tension in each of his divisional executives by using an external ‘bar’ that sparks a new kind of thinking—an entrepreneurial, opportunity-driven mindset (Lumpkin & Lichtenstein, 2005) through which these executive managers identify, create and act on new business opportunities. As Gartner (1993; Gartner et al., 1992) shows, organizational emergence often starts in the same way: in rare moments of tension an individual sees an opportunity for change, and at the same time feels the internal drive to act on that opportunity. Such unique experiences, along with the commitment and follow-up they catalyze, are often at the origin of opportunity tension.

Cycles of Opportunity Tension

This urgency, this push, does not last forever; the internal tension that drives action does not exist indefinitely at that initial very high rate. Instead, a flush of creative energy and hard work that can last for a period of weeks or months ultimately settles down into a more sustainable degree of intensity. Thus, opportunity tension occurs in ebbs and flows, just exactly like creative tension (Fritz, 1989). Specifically the energy of creative tension, which is at the heart of opportunity tension, is generated through a polarization—the ‘distance’ between one’s envisioned goal and one’s present state: The farther from the goal, the higher the creative tension to achieve it (Senge, 2006). Once the goal has been achieved, creative tension is reduced.

Like the source of creative tension in artists, opportunity tension motivates action for an intense period of time, sometimes generating a kind of “flow” state (Csikszentmih-alyi, 1990). Within this flow state, organizing continues until the initial goal is achieved (Lichtenstein et al, 2007); sometimes the goal itself changes through the organizing process (Lichtenstein, Dooley, & Lumpkin, 2006; Sarasvathy, 2001). Yet once reached, even for short period of time, the degree of intensity is relieved.

Opportunity tension is thus a pulse of activity—a committed intention to pursue this project and generate an emergent result. The project can be the creation of a new business, the re-creation of an existing company, or a much more contained initiative that extends some quality of the organization. Given the right set of resources and conditions new order may come into being; this emergent order literally converts the environmental (market) potential into real value for customers who pay for that value using resources (e.g., money) that keeps the organizational operating.

As others have pointed out, this process of emergence is often expressed as a “state change” within an organization (Cheng & Van de Ven, 1996; Dooley, 1997) as the firm or company move from one “dynamic state” to another (Levie & Lichtenstein, in press). For example, Plowman and her colleagues show how Mission Church transformed from a “silk-and-stockings” congregation in one era, to a social activist community in a new era that worked tirelessly to improve conditions in its inner-city neighborhood. Chiles and his colleagues show how the emergence of Branson, MO occurred in a series of “epochs,” each era of change representing a transformative shift from one set of disequilibrium conditions to another. In a similar fashion Lichtenstein, Dooley & Lumpkin’s (2006) analysis of one start-up venture identified an “emergence event”—a punctuated shift in strategy and tactics that reflected a new goal and vision for the company, and the entrepreneurial pursuit of a new opportunity.

In each of these cases, entrepreneurial action forms around one opportunity; this may be followed by another opportunity, and so on; each of these initiates a new cycle of opportunity tension. Each of these cycles represents a distinct phase of activity, initiated by the combination of exogenous forces of change and endogenous forces of creative expression, resulting in new products and offerings that yields more novelty in the market, attracting more customers (additional revenue streams) and maintaining the organization at this next dynamic state (Levie & Lichtenstein, in press). Entrepreneurial leaders are always on the lookout for new opportunities, each of which may catapult the organization to yet another new dynamic state.

Chiles and his colleagues (Chiles et al, 2010a, 2010b) have explored this cyclic process deeply, providing a powerful framework for understanding the dynamics of markets in continual disequilibrium. In their view, any given “round” of competition—each cycle of opportunity tension—may be followed by another round or cycle of emergent change:

Dynamic Creation

Taking this further allows us to envision a truly dynamic systems science that is built around disequilibrium processes as the norm rather than the exception (Meyer et al, 2005; McKelvey, 2006; Andriani & McKelvey, 2009; Chiles et al., 2010b). In the words of Meyer and his colleagues (2005: 471) such an approach would “...embrace notions like coevolution, CAS, field configuration, network formation, autocatalytic feedback, niche evolution, and emergence.” An excellent term for this science is “dynamic creation,” through which “. plans, resources, and market forces are constantly in flux. This ferment spawns new plans, new resources, and new forces in an unending cycle of reiterative creation” (Chiles et al, 2010a: 7).

Chiles and his colleagues have been artfully developing this dynamic model through their explication of a Radical Subjectivist Austrian economics. Their analysis focuses on the self-organized creation of economic markets; opportunity tension is the entrepreneurial drive that underlies the novelty in those markets. In a broad sense Chiles’s approach and mine are not distinct but rather are complementary and interdependent. In particular, they argue (Chiles et al., 2010a: 26) that an entrepreneur’s expectations about the needs of potential customers “...generates opportunity tension,” (a term that I suggested to Todd Chiles upon reading their working paper). This leads to the creation of new products and services, i.e., a “source of novelty.. .that moves markets away from equilibrium and initiates order creation.” They see the novelty of new offerings as the basis of systemic heterogeneity, which is itself the driver of economic order: “This heterogeneity in turn begets still more novelty, and so on in an ongoing rivalrous process that generates increasing product heterogeneity as the market moves farther from equilibrium.”

They suggest that these processes build on themselves, generating a momentum that increases the likelihood of further organizing. Although that may be true at a macro level, in entrepreneurial terms these order creation process are less common; they represent an “extreme event” that can push the organiza-tion/ecology system beyond its norm and into a new level of order (McKelvey & Andriani, 2005).

Sustainability and Value Creation

Further—and this is a very important distinction—unique opportunity tension events are viable only if there is a potential pool of resources that the entrepreneur believes s/he can capture through this new round of organizing. That’s because in order to maintain a newly expanded system, a higher amount of “negative” entropy is needed, i.e., a system farther-from-equilibrium requires more net resources to maintain itself in its new expanded state (Levie & Lichtenstein, in press). In ecological terms, dynamic creation is only viable to the degree that it is sustainable, for new order can only be created and maintained through the transformation of energy that exists in some form. For a time entrepreneurs can draw on the energy of personal passion, social connection and shared vision, but as any leader knows even these have some limit. These limits are far more visible when the resources needed to create value are more physical, as in any company that makes and sells tangible objects. The current levels of environmental degradation around the world show the severe limitations to a belief in unlimited material growth. For these reasons, dynamic creation must be bound up with an economics and a systems science of sustainability.

A second implication, less severe but more broad, is that all organizing must generate value of some kind if it is to survive for any length of time. In formal terms, emergent order is always based on value creation, because continuing to produce that value—whether social or economic—requires a consistent input of energy that maintains the system in a sustainable way. We’ve already seen the business examples: A firm that produces value through the ‘widget’ it creates is maintained by the revenues it receives from the customers who pay for the widget in exchange for the value it provides them.

This implication extends much further than organization creation. This paper emerged because of the value that I perceived it would create for my readers and for me; that perceived value has sustained me through the writing and revision process. By extension, the emergence of Emergence: Complexity & Organization is based on the value that it provides for scholars and practitioners; that value is paid for through subscriptions which sustain the activities required to produce and publish the journal (albeit to a lesser degree than the publisher would like, I am sure.!). In this way, I posit that the sustained emergence of any entity can be traced to the value which it creates; when the perceived value of the offering is less than what it ‘costs’ (in energy, time, money, etc.) to produce it, the venture or initiative will cease to exist (unless it is maintained by some other source).