Hyperopic Search: Organizations Learning About Managers Learning About Strategies

Early-stage experiments are central to the design-thinking approach to organizational innovation, and they are also a core practice in evidence-based management. Organizations use experiments to test new strategies in a low-stakes setting before escalating their commitment to a new initiative. Yet organizations also use experiments to evaluate managers who will implement these strategies in a high-stakes setting. I develop a formal model to demonstrate that these two types of evaluations are fundamentally incompatible. Managers who fear replacement in response to a poor experimental outcome pervert their experiments to maximize the likelihood that they succeed. This saps early experiments of much of their informational value. I show that if an organization can observe a manager's experimental strategies and the experiment’s outcomes and can commit ahead of time to an evaluation and replacement rubric, then it can resolve this agency problem. However, if a manager's experimental strategy cannot be credibly communicated, the organization will either replace good managers to induce a desirable experimental strategy or retain bad managers to alleviate the fear of replacement. I show that in low-uncertainty environments, the control exerted by the former replacement regime offers the best results, whereas, in high-uncertainty environments, commitment to retention regardless of experimental outcomes is best.